Public sector exit payments: Government publishes draft regulations imposing a £95,000 cap

Since 2015, the Government have been proposing to impose a cap on public sector exit payments. The intention is to prevent employers paying out large sums of public money to individuals leaving their employment. After various consultations and responses to consultations, draft regulations have now been published outlining further details of the proposed £95,000 cap on exit payments in the public sector. The full regulations can be found here.

Background to the proposed cap

The first consultation on this proposal began in 2015 following which, The Small Business, Enterprise and Employment Act 2015 was amended to empower the Treasury to implement regulations that impose a £95,000 cap on public sector exit payments. Draft Public Sector Exit Payment Regulations 2016 were thereafter published at the end of 2015 however these were never adopted.

In 2019, the proposals were resurrected and the draft 2019 regulations and accompanying guidance were published and a fresh consultation period was launched. This consultation period closed on the 3 July 2019 and on the 21 July 2020, the Government published its response to the consultation. On the 27 July 2020, the Draft Restriction of Public Sector Exit Payments Regulations 2020 were published which we have explored in further detail below.

Content of The Draft Restriction of Public Sector Exit Payments Regulations 2020

It is important to note that these regulations are currently only in draft form and the date they are expected to come into force has not yet been confirmed. In regards to the amount of the cap, the Government confirmed in their response to the consultation on the 2019 draft regulations that they intended to keep this at £95,000 but that this amount will be kept under review.

Under draft 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. The full list can be found in the Schedule to the draft regulations.

Exit payments that fall under the draft regulations include any payment on account of dismissal by reason of redundancy, pension strain payments, any severance or ex gratia payments, payment in lieu of notice due under an employment contract and any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office. Draft regulation 5 outlines the full list of payments deemed to be exit payments. 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 and any payment in lieu of notice that does not exceed one quarter of the individual’s salary.

Draft regulation 7 protects statutory redundancy payments by requiring the cap to be applied to other exit payments being made, rather than to the statutory redundancy payment. Certain situations in which the application of the cap is to be relaxed is also provided for and there is no order in which payments must be counted towards the cap.

Implications for employers in the public sector

Although not currently in force, it is important for employers caught by the draft regulations, such as schools, to be aware of the cap and relevant restrictions on exit payments which will be particularly relevant for senior employees. Finalised guidance and mandatory Treasury directions are awaited which will hopefully assist employers with the application of the cap to relevant exit payments but legal advice should be sought if there are any doubts.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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