Overview of the Restriction of Public Sector Exit Payments Regulations 2020

From 4 November 2020, a cap of £95,000 will apply to public sector exit payments to prevent employers paying out large sums of public money to individuals leaving their employment. Public sector employers must therefore be aware of the new restrictions their applicability to exits after this date. We have summarised key points of the regulations below.

Which authorities does the cap apply to?

A broad range of public bodies are covered and a full list is contained in a schedule to the regulations.  Under regulation 3, ‘a relevant authority must not make an exit payment to a person which exceeds the exit payment cap in respect of a relevant public sector exit.’ Relevant authorities are defined within the regulations and the extensive list includes, local authorities, the NHS, police forces, Government bodies and academies and maintained schools. Some authorities such as universities and further education colleges (except sixth-form academies) are not covered by the cap.

Importantly, where two or more relevant public sector exits occur in respect of the same person within any period of 28 consecutive days, the total amount of the exit payments made to that person must not exceed £95,000.

What payments are covered?

Regulation 5 outlines the following list of payments deemed to be exit payments:

• any payment on account of dismissal by reason of redundancy;
• compensation under a settlement agreement;
• pension strain payments;
• any severance or ex gratia payments;
• payment in lieu of notice due under an employment contract that exceeds one quarter of the employee’s annual salary;
• payments in the form of shares or share options;
• any payment on voluntary exit;
• any payment to extinguish any liability to pay money under a fixed term contract; and
• any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office.

Payments exempt from the restrictions include, payments in respect of death in service, incapacity as a result of accident, injury or illness, untaken annual leave, any payment in compliance with an order of a court or tribunal and any payment in lieu of notice that does not exceed one quarter of the individual’s salary.

When will the cap be relaxed?

In certain circumstances, Ministers of the Crown have the power to relax the restrictions and there are mandatory and discretionary reasons to do so. The mandatory reasons for exercising the power to relax the restrictions apply to payments arising as a result of TUPE and in certain tribunal claims, such as detriment or unfair dismissal in health and safety and whistleblowing cases and discrimination cases.

Discretionary reasons to relax the cap include in situations where the cap would cause undue hardship or inhibit workplace reforms, or a written agreement to exit was made before the regulations came into force (on 4 November 2020). Permission from the Treasury must be sought before exercising this power. There is also a duty for employers to keep a record and publish payments in which the cap has been relaxed at the end of the financial year.

What are the implications for public sector employers?

There is no transition period, so the regulations will be relevant for any employers making redundancies after 4 November 2020. Employers should also be aware that if the employee is over 55 and in the Local Government Pension Scheme, the rules relating to pension strain are changing as a result of the regulations which we have explored further here. Government guidance is now available to assist employers with the application of the cap to relevant exit payments, but legal advice should be sought if there are any doubts.