The hidden pitfalls of the changes to public sector exit payments

Kim Howell, Geldards

The general provisions of the proposed changes to public sector exit payments are now widely known in the form of the £95,000 cap on the value of exit payments and the recovery of exit payments to high-earning employees, that is those receiving remuneration of £80,000 per year who are re-engaged in the public sector within 12 months. However, there are potential hidden pitfalls in these proposals that are not so obvious on first reading and of which local authorities need to be aware.

The potential for claims of negligent misstatement

It is a well established employment principle that the employer is under a duty to take reasonable care to ensure that information provided to transferring employees must be accurate, and that the statements of intent are capable of being fulfilled.

This was confirmed in the case of Hagen & Ors v ICI Chemicals & Polymers Ltd & Ors (2002) in a Transfer of Undertakings (Protection of Employment) Regulations (TUPE) context concerning the transfer of the central engineering resource section of ICI. Various promises were given and representations made by the transferor and transferee to the employees, especially about the post-transfer occupational pension entitlement. After the transfer, employees believed that the promises had not been honoured and that they had been misled and so they sued. The High Court decided that the transferor had been guilty of negligent misstatement in respect of pension arrangements as it had not properly explained the full impact and implications and therefore was in breach of its duty of care. The employees had reasonably relied on the transferor’s representations in relation to their entitlements and damages could therefore be recovered.

This principle also seems wholly relevant where exit payments are concerned. A scenario could easily arise where the terms of an exit payment are being negotiated now but will not take effect until the employee’s notice period ends, which may be after provisions for recovery and the cap come into force. The (draft) Recovery of Public Sector Exit Payment Regulations state that ‘for the purposes of these Regulations, an exit payee is deemed to have received a qualifying exit payment on the same day as they left the employment or ceased to hold the office in respect of which the qualifying exit payment was made’.

There have been several examples where employees have been invited to volunteer for redundancy but have not been made aware that there could be a requirement to repay some, or all, of that payment if they return to work in the public sector within 12 months depending on when the recovery provisions come into force. Employers who have not fully appreciated the potential impact of these recovery provisions could be liable to pay damages to those employees who are consequently prejudiced.

The likelihood of this happening is probably greater in relation to the recovery provisions that are anticipated to come into force in the next few months, but could also apply in relation to the cap which is currently earmarked to take effect from October 2016.

Local authorities should be advising staff now on the implications of the recovery provisions and the cap, where they will apply, in relation to any exit payments proposed where the payment could take effect after the new provisions have come into force.

Contractual and policy issues

There may be further issues arising from the imposition of the cap in relation to long-standing contractual notice periods for high-earning local authority employees. These individuals may have long notice periods in their contracts of employment. Payments in lieu of notice are included in the current version of the draft regulations and would therefore be caught by the cap. It will be necessary for local authorities who have longer notice periods in the contracts of more senior and more highly paid employees to consider these consequences.

It will also be necessary for local authorities to review their redundancy policies with regard to both the recovery provisions and the cap. These policies will, in the vast majority of instances, have been agreed annually by full council with regard to the discretionary powers exercisable under the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006. There is also a further government consultation ongoing in relation to limiting public sector exit payment terms which may have an impact on these policies in the future.

TUPE and employees

The provisions in relation to the cap do not apply where the employee has an entitlement to certain exit provisions under the automatic transfer provisions of TUPE. This may result in a situation where some employees need to be treated preferentially in accordance with their terms and conditions and will be in a more advantageous position than their colleagues by virtue of the fact that the cap will not apply to them. Local authorities who have any staff with such legacy terms will need to be aware of them and be mindful of them in relation to any exit payments made.

Impact on low-earning long-serving employees

The provisions of the Enterprise Act 2016 which relate to the Local Government Pension Scheme will limit the entitlement to unreduced pension where the cost of providing those benefits exceeds the cap.

There is a possibility that an exit payment for a low-earning but long-serving local authority employee could exceed the £95,000 when the cost of their pension benefit is included.

This provision applies even in circumstances where the member of the scheme is over 55 and is eligible to take their pension if their employment ends on grounds of redundancy or business efficiency. The provisions require employees to fund any actuarial reduction resulting from early payment. The alternative is that they will have an ongoing reduction in their pension. It is unclear how the Local Government Pension Scheme will be able to accommodate partial payment of the employee entitlement to unreduced pension when the employer will be protected by the cap from fully funding the cost.

It remains to be seen whether local government will follow the health sector and the civil service where entitlement to unreduced pension has been withdrawn, save where employees elect to divert part of their cash compensation to fund it. Neither of these options is likely to be popular with retirees and could result in a significant reduction in the amount they expect to receive on retirement.

There is also clearly an age discrimination element in relation to the cap on the basis that it is likely to disadvantage older, longer-serving employees disproportionately to their younger colleagues.

Exodus or entrenchment

The potential financial implications for employees of the recovery provisions and, possibly to a greater extent, the cap on exit payments is likely to have an effect in terms of staff planning for local authorities. Local authorities may well see an increase in requests for early retirement or voluntary redundancy before the provisions come into force. This will leave local authorities with the decision of whether to delay staff exits in order to save money.

It is also likely that the effect of the exit payment provisions, once they come into force, will make voluntary redundancy a far less attractive proposition particularly in relation to older employees. Local authorities may find themselves with workforce planning issues as a result.

It is clear that local authorities need to be mindful of these potential hidden pitfalls now and to consider the impact they may have once they are in force.