Public sector exit payments: cap, clawback and consistency

Sarah Lamont, Bevan Brittan

Currently there are three proposals from the government to change exit payments in the public sector:

  • a cap of £95,000 on the total aggregate value of exit payments made to most public sector workers. Draft Public Sector Exit Payment Regulations 2016 have been published which will impose a cap;
  • recovery of exit payments made to higher-earning employees within the public sector who are re-engaged in the public sector within a period of 12 months. There are draft regulations, which have been subject to further consultation, and which were due to take effect from April 2016, although we understand it is more likely to be May 2016; and
  • proposals to further restrict public sector redundancy payments by coordinating the rules for calculating payoffs across the civil service, the NHS and local government. Consultation on this was launched on 5 February 2016.

The impact of these changes will be far reaching as set out below.

The £95,000 cap on exit payments

On 16 September 2015, the government published its response to the (very brief) consultation on the proposed introduction of a £95,000 cap on the total aggregate value of all exit payments made to most public sector employees. It will apply, among other bodies, to local authorities, the NHS, the police force and schools.

The government intends to proceed by introducing the cap via the Enterprise Bill. The detail of the measures will be implemented through secondary legislation; this is anticipated for the summer or autumn of 2016.

On 3 November 2015 the government published the draft Public Sector Exit Payment Regulations 2016, which contain details of the restriction on public sector exit payments.

The exit payment threshold, or the cap, is set at £95,000, but may be varied by further regulations. The cap will apply to:

  • redundancy and voluntary exit payments;
  • payments to reduce or eliminate an actuarial reduction to a pension on early retirement;
  • payments to discharge liability under a fixed term contract;
  • payments by way of shares on loss of employment; and
  • any other payment (whether or not contractual) made in consequence of loss of employment.

In relation to this last point, the government has confirmed that this will include payments in lieu of notice but it is not clear how this will affect existing contracts where a payment in lieu of the contractual notice period would exceed £95,000. It will be possible to waive the cap in a particular case with consent from the relevant minister, or from the full council in the case of local government exit payments, but it is not yet clear what would support such a waiver from full council.

The cap will not apply to:

  • payments made for incapacity or death as a result of accident, injury or illness;
  • payments of accrued but untaken holiday as the government conceded this point in light of consultation responses;
  • bonus payments;
  • payments made in damages ordered by a court;
  • early retirement payments to firefighters; and
  • payments to employees with protected terms following a TUPE transfer.

As ever, the devil will be in the detail. We understand that HM Treasury has confirmed that the draft regulations have been published for illustrative purposes only as a means of informing parliamentary debate on the relevant provisions of the Enterprise Bill. The government intends to lay a further version of the regulations which will be subject to affirmative resolution after the Enterprise Bill receives royal assent.

Recovery of exit payments

On 25 June 2014, HM Treasury published a consultation on the recovery of public sector exit payments and responded to that consultation on 28 October 2014. Then on 21 December 2015, HM Treasury published a consultation on draft Repayment of Public Sector Exit Payments Regulations 2016 to implement its proposals, under the Small Business, Enterprise and Employment Act 2015. Since the consultation in 2014, the government has modified some elements of the policy. There have been some significant changes:

  • the minimum salary to which the recovery provisions will apply has been reduced from £100,000 to £80,000 per year;
  • applying the exit payment recovery policy to qualifying returns to any part of the public sector, instead of only returns to the same part of the public sector;
  • removing the full recovery period of 28 days and the tapering will now commence on day 1 following termination, effectively reducing the repayment liability proportionately over the subsequent 365 days; and
  • including employer-funded pension top up payments made under the Local Government Pension Scheme within the sums to be recovered, in order to align with the recovery of other similar payments.

The consultation documents also list the types of payment and the public sector organisations that are in scope of the regulations and those that are proposed to be exempt. It makes clear that the policy would apply to all bodies within the definition of the public sector by the Office for National Statistics (ONS), except those granted an exemption. It states that housing associations would be granted an exemption, as the intention is to ensure that the ONS reclassifies them as part of the private sector.

The Secretary of State of the parent department of each subsector may decide whether to grant a waiver to an individual to remove the obligation to repay. Again, full council may grant a waiver for repayment in cases involving local authorities, and for the local government bodies for which they have oversight or control.

It is important to note that the legislation will cover individuals who return to work for a public sector organisation off payroll, for example, as an individual consultant or as an employee of a consultancy firm.

Review of consistency in redundancy payments across the public sector

If the above were not enough to be dealing with, on 5 February 2016 HM Treasury published a consultation on what it called ‘further cross-public sector action on exit payment terms, to reduce the costs of redundancy payments and ensure greater consistency between workforces’.

The proposals will apply to the majority of public sector employees, and the government is proposing to take action on some, or all, of the following elements across all major public sector compensation provision:

  • setting the maximum tariff for calculating exit payments at three weeks’ pay per year of service;
  • capping the maximum number of months’ salary that can be used when calculating redundancy payments to 15 months;
  • setting a maximum salary for the calculation of exit payments. This limit could be set at various levels and could potentially align with the NHS redundancy scheme’s salary cap of £80,000;
  • enabling the amount of lump sum compensation an individual is entitled to receive to be tapered as they get close to the normal pension age or target retirement age of the pension scheme to which they belong, or could belong, in that employment; and
  • reducing the cost of employer-funded pension top up payments, such as limiting the amount for early retirement, or removing access to them, and increasing the minimum age at which an employee is able to receive an employer-funded pension top-up.

Comment

These changes raise a number of issues for local authorities.

The £95,000 cap is ostensibly to address the public perception that senior employees are being given six-figure pay-outs at the expense of the public purse. However, a cap set at this level could catch much lower earners with long service in the public sector. This is because the cost of enhancing pension for, for example, those in the Local Government Pension Scheme who are 55 or over, known as ‘pension strain’, is also included in the £95,000 cap.

A concern among authorities is that the cap, particularly including the strain on fund cost in the cap, would erode the ability of employers to manage their workforce reduction programmes in an effective way. There is likely to be an increase in the number of employees who are currently eligible for early retirement seeking to leave now, prior to the introduction of the cap, under voluntary redundancy arrangements, which could potentially mean a drain of knowledge and talent. In addition, after the cap is introduced, restrictions on pay outs for senior or long-serving staff could have an impact on how redundancy exercises are planned overall.

Authorities have questioned the necessity of applying the cap to local government, which already operates within a transparent framework. This includes published policies, whereby an exit payment of over £100,000 has to be approved by full council.

There is a concern that the combined impact of the statutory cap and repayment provisions will be to drive talented employees out of the public sector ahead of the imposition of the cap and then to keep them out of the public sector, at least for an extended period.

These regulations are also complicated and detailed; having similar titles adds to the confusion. To have two sets of regulations dealing with similar issues seems unnecessarily piecemeal as an approach and it will be important to be familiar with the detail of all the regulations and the parent legislation.

Sarah Lamont | Partner, Bevan Brittan
0370 194 5477
sarah.lamont@bevanbrittan.com

Frances Woodhead | Partner, Bevan Brittan
0370 194 5477
frances.woodhead@bevanbrittan.com

Ashley Norman | Partner, Bevan Brittan
0370 194 5477
ashley.norman@bevanbrittan.com