A £95,000 cap on the pre-tax total value of exit payments in the public sector will come into force on 4 November 2020. This will have significant implications for public sector organisations, particularly those planning or going through restructuring at the moment. Organisations that must apply the cap need to start planning for this change now and ensure they follow the new rules when they come into force.

The cap is expected to lead to significant savings for the Treasury. According to the annually published Whole of Government Accounts, exit packages over £100,000 amounted to £200 million in the 2017-18 financial year. The total of all exit packages in the same financial year was £900 million. Compulsory redundancies and other agreed departures such as voluntary redundancies are included within this total.

The government first consulted on proposals to introduce a cap on public sector exit payments back in August 2015 Following a consultation in 2019, the Restriction of Public Sector Exit Payments Regulations 2020 were made on 14 October 2020. The Regulations will prevent 'relevant authorities' - which includes most of the public sector - from making exit payments which when taken together total in excess of the £95,000 cap on or after 4 November 2020.

How does the cap work?

The public sector bodies that the cap applies to are set out in the Regulations. They capture a very broad range of public bodies from government departments and local authorities to the BBC World Service and NHS trusts. There are some publicly-funded bodies which are not caught by the Regulations though, including universities and further education colleges whose severance arrangements are overseen by the funding councils.

"Exit payments" are payments made to employees on the termination of their employment or office holders who leave office. The Regulations come into force on 4 November 2020 and there are no transitional provisions. This therefore means that if an exit payment is made on or after 4 November 2020, the cap will apply, even if the terms of the exit were agreed, or the exit occurred beforehand. The total of all exit payments cannot exceed £95,000 gross.

What payments count towards the cap?

Various types of payments count towards the exit pay cap. These include redundancy payments, severance payments and ex gratia sums, settlement agreements, a payment in lieu of notice that exceeds one quarter of the employee's annual salary, shares and share options and 'pension strain' payments (i.e. additional employer pension fund contributions to enable an individual to take early retirement on an unreduced pension).

Any compensation payments to be made as a result of a settlement agreement, conciliation agreement or arbitration award are also caught by the cap.

What payments are excluded from the cap?

Where an employee refuses to settle and takes their case to a court or tribunal and wins, any sums paid to them as a result of a judgement in their favour would not be treated as an exit payment and so would not be subject to the cap. Some commentators have already pointed out that this encourages parties to litigate rather than settle.

There are a number of other payments which do not count towards the exit pay cap. These include death in service payments, payments for accidents, injuries or illness, payments in lieu of untaken holiday, payments in lieu of notice that do not exceed one quarter of the employee's annual salary and payments made to comply with a court or tribunal order.

Where an employee receives exit payments from two or more authorities that are caught by the rules within a 28-day period, the cap applies to the total of those payments. There are specific rules to follow about applying the cap where this is the case.

There are also obligations on those receiving exit payments to inform any other relevant authority they work for of this fact. They must tell the other relevant authorities when their employment ended, what type of exit payments they received and the total amount of their exit payment.

Will there be any situations when the cap can be relaxed?

Ministers have the power to relax the cap in certain cases.

The Regulations also give this power to local authorities, provided they act in accordance with Treasury Directions or otherwise with the consent of the Treasury. The Treasury is due to publish updated guidance and a Treasury Direction on applying the exit pay cap. These will provide organisations with further information on how to apply the cap and cover issues such as the circumstances in which the cap may or must be relaxed.

Draft guidance and Directions that accompanied the 2019 consultation said that in certain 'mandatory caseslocal authorities have to waive the cap. This included settlement agreements relating to whistleblowing or discrimination cases.

In certain 'discretionary cases' local authorities could also seek permission from the Treasury to waive the cap. This included cases where the cap could cause undue hardship or inhibit workplace reforms.

What do these changes mean for employers

An important point to note is that while the regulations prohibit the relevant authority from making the payment, they do not alter the employee's entitlement  to those payments. This will compel the employee to resort to litigation where the employee is entitled to a payment under their employment contract or legislation, but their employer cannot pay it due to the cap (as mentioned above, there are a number of circumstances in which the cap can be waived, one of which being a court judgement in the employee's favour). The British Medical Association has sought permission to judicially review the Regulations on the basis that they may unlawfully interfere with workers' legal entitlements.

Concern has also been raised by some about the inclusion of 'pension strain' payments in the cap and how this would affect long-serving lower earning employees.

With one week before the cap comes into force, public sector organisations have to adapt quickly to the new rules and review any planned exits due to take place – as well as agreed payments due to be paid on or after 4 November 2020 to ensure any exit pay does not exceed the cap. Final guidance and Treasury directions on the 2020 Regulations are awaited but are expected to be published shortly.

The Scottish Government opted not to legislate in equivalent terms and instead applied the £95,000 cap by amending the Scottish Public Finance Manual in September 2019. The Manual states that payments to individuals will normally be capped at £95,000. Where a body considers that there are compelling reasons to exceed the cap, a full business case must be discussed with the relevant Minister setting out fully the reasons why applying the cap is not possible.

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.