The Restriction of Public Sector Exit Payments Regulations 2020 (the Regulations) were made on 14 October 2020 and came into force on 04 November 2020.

The Regulations impose a cap of £95,000 (the cap) on exit payments in the public sector. Public sectors bodies within the scope of the Regulations include the NHS, as well as local authorities, maintained and academy schools, fire authorities, the civil service and the police.

Last month, HM Treasury published guidance (the Guidance), and HM Treasury Directions on implementation of the Regulations (the Regulations). The main points of the Guidance, Regulations and Directions are set out below.

The Regulations take precedence over existing contractual agreements in addition to earlier regulations and other exit schemes which make more generous provisions when compared to the Regulations, unless these arrangements are exempt as set out below. Consequently the changes made to the NHS redundancy pay provisions, on 1 April 2015, which saw the introduction of a salary cap of £80,000 are superseded by the Regulations because total payments now must not exceed the exit payment cap (it is not simply a salary cap).

Regulation 5 describes 'exit payments' as follows (when made in consequence of termination of employment or office):

  • Subject to regulation 7, any payment on account of dismissal by reason of redundancy
  • Any payment to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost to a pension scheme of such a reduction not being made.
  • Any payment pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement
  • Any severance payment or ex gratia payment
  • Any payment in the form of shares or share options
  • Any payment on voluntary exit
  • Any payment in lieu of notice due under a contract of employment
  • Any payment to extinguish any liability to pay money under a fixed term contract
  • Any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office

Regulation 6 describes payments that are exempt from the cap (in other words where higher amounts might be paid). These include:

  • Any payment in respect of death in service
  • Any payment in respect of incapacity as a result of accident, injury or illness
  • Any payment in respect of annual leave due under a contract of employment but not taken
  • Any payment in compliance with an order of a court or tribunal
  • Any payment in lieu of notice due under a contract of employment that does not exceed one quarter of the relevant person's salary

Regulation 7 sets out prohibition on reducing a statutory redundancy payment or its equivalent. However, where an individual receives a statutory redundancy payment plus other exit payments, the total of which exceeds the cap, then the other exit payments must be reduced, to zero if necessary, so the total sum does not exceed the cap amount. For example, employer funded early access to pension payments are within the scope of the cap (referred to within the Guidance as 'pension strain or pension top-up payments'). Historically, NHS employees could choose to use their redundancy payment to fund the actuarial shortfall in their pension if taking it early and the employer was liable for any shortfall. However, this employer liability was removed on 1 April 2015, consequently pension top-up payments may not be of any great concern when considering exit payments now. Nevertheless, it is still important to bear in mind that it is the aggregate sum that must fall within the cap.

Ultimately, it is for the employer to establish if and how the cap applies to each element of the exit payment. HM Treasury has not prescribed an order for prioritising elements that make up a total exit payment to ensure employers have flexibility.

Multiple exit payments

Where two or more exits take place within 28 days (multiple exit payments) and as a result the total would exceed the cap, the Regulations prescribe the sequence in which exit payment will have been paid for the purpose of applying the cap. The Guidance provides the following example at paragraph 4.6:

'Where an individual leaves employment with authority A and with exit payment of £50,000, then leaves employment with authority B within the next 28 days, authority B should not make an exit payment in excess of £45,000'. Therefore, it is important that employers know what, if any, sums where paid to the employee in previous employment to ensure they do not fall foul of the cap. One assumes that, in the above scenario, if 28 days has passed, authority B would be able to pay up to £95,000 but it remains unclear.

Relaxation of the cap

Mandatory exercise of the power

Section 153C(1) of the Small Business, Enterprise and Employment Act 2015 provides power to relax the restriction/cap. The Regulations give this power to the Decision Maker (defined as Minsters of the Crown or the full council of a local authority in England) to exercise following compliance with the HM Treasury Directions (the Directions) or alternatively, with consent of the Treasury. This does not apply to payments made by a devolved Welsh authority.

The Directions state it is mandatory to exercise the power to relax the restriction in relation to payments arising as a result of:

  • a TUPE transfer; or
  • employment tribunal claims arising from health and safety, whistleblowing and discrimination where the Decision Maker is satisfied on the balance of probabilities that a tribunal would make an award or order of compensation.

With regard to the second bullet point above, when determining the balance of probabilities, one assumes legal advice may be required to satisfy the Decision Maker but need not to go as far as obtaining Treasury approval because approval/consent only applies if one does not comply with the Directions.

Discretionary exercise of the power

The Decision Maker may exercise the power to relax the cap where they are satisfied:

  • that not exercising the power would cause undue hardship
  • that not exercising the power would significantly inhibit workforce reform
  • that a written agreement to exit was made before the coming into force of the Regulations
    • that it was the intention of both parties that the exit would occur before that date;
    • that any delay to the date of exit was not attributable to the employee or office holder as applicable.

It is unclear how 'undue hardship' is to be quantified and it may be regarded as quite subjective and therefore open to debate. Additionally, one must be careful to exercise the discretion consistently so as to avoid potential allegations of discrimination.

If it is a local authority, rather than a minister of the crown, that seeks to exercise the above discretion, then Treasury consent is required beforehand.

Records and reporting

Employer's responsibilities

The Regulations do not require employers to keep records of exit payments which have been capped. However, it may be prudent to do so for public accountability purposes. On the other hand, where the cap has been relaxed employers must keep a separate record of the exercise of the power. This must be kept for a minimum of three years from the date the power is exercised, showing:

  • the name of the payee in respect of whom the cap was relaxed;
  • the amount and type of the qualifying exit payment for which the cap was relaxed;
  • the date on which the power to relax the cap was exercised; and
  • the reason why the power was exercised (this should refer to the Guidance and be sufficiently detailed to enable HM Treasury to assess if it has been appropriately applied).

Employers must publish the above information (save for the payee details) at the end of the financial year. The government strongly recommends that the information is published in annual accounts.

Individual responsibilities

Where an employee is entitled to receive an exit payment, they must provide the following information in writing to the authorities:

  • that they are entitled to receive an exit payment;
  • the amount and type of that exit payment;
  • the date that they left employment; and
  • the identity of the relevant authority that made the exit payment.

Overall, employers are responsible for ensuring any exit payment it makes does not exceed the public sector exit payment cap (save for the mandatory waivers and/or exercising discretion to waive the cap mentioned above). Any payment that exceeds the cap and is not compliant with the Regulations or Directions is considered a payment beyond the organisation's legal competence (and therefore ultra vires) which may result in sanctions on the organisation or, if appropriate, on the sponsoring department by HM Treasury. The Guidance does not stipulate what kind of sanctions may be implemented.

For public sector bodies, especially those involved in reorganisation, or change management programmes, the cap is likely to have significant implications when there is a need for restructuring of management teams or other employees, unless, of course, the cap can be relaxed on the basis that it would significantly inhibit workforce reform. How severe the inhibition has to be has yet to be put to the test.

If you are in the midst of negotiating an exit package for any staff and would like some advice or support in relation to the exit payment cap, please do not hesitate to contact the Health Employment team.

Originally Published By Hill Dickinson, November 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.