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Background

In 2016, the Small Business, Enterprise and Employment Act 2015 was amended to give the Treasury the power to make regulations to prohibit prescribed public sector bodies from making exit payments in excess of a £95,000 cap. The Government said that the measure was designed to prevent large exit payments to “public sector fat cats”, although bodies representing public sector workers expressed concerns that it could hurt lower-paid staff, especially those with long service.

Restriction of Public Sector Exit Payment Regulations 2020

Following a consultation in 2019 the Government laid the draft Restriction of Public Sector Exit Payment Regulations 2020 before Parliament in July 2020. The Regulations were approved by both Houses of Parliament in September and were made (signed into law) on 14 October. They come into force on 4 November 2020.

The Regulations will prevent relevant authorities from making exit payments in excess of the £95,000 cap. “Relevant authorities” are defined as public sector bodies listed in the legislation. It captures the majority of the public sector. “Exit payments” are payments made to employees on termination of employment or office holders who leave office.

Under the Regulations various payments count towards the exit payment cap. These include redundancy payments, severance payments, settlement agreements and ‘pension strain’ payments (i.e. additional employer pension contribution to enable an individual to take early retirement on an unreduced pension). It is the total of all exit payments that cannot exceed £95,000.

There are a number of payments that do not count towards the exit payment cap. These include payments for death in service, payments for accidents or injuries, certain payments relating to firemen and judicial pension schemes and payments pursuant to a court order.

Crucially, while the regulations prohibit the relevant authority from making the payment, they do not alter the employee’s entitlement to those payments. Some stakeholders, like the Employment Lawyers Association, have suggested that this could lead to legal disputes. The British Medical Association has sought permission to judicially review the Regulations on the basis that they unlawfully interfere with workers’ legal entitlements.

Reaction

A number of stakeholders, particularly local government employers and staff representatives, expressed concern about the inclusion of ‘pension strain’ payments in the cap and how this would affect long-serving lower earning employees.

Concern has also been expressed that payments under settlement agreements – contracts that end a legal dispute – count as exit payments. Stakeholders and a number of MPs and peers suggested that this could encourage parties to litigate rather than settle.

Under the 2015 Act, 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 Government has said it will publish guidance and Directions before the legislation comes into force. Draft guidance and Directions that accompanied the 2019 consultation said that in certain ‘mandatory cases’ local authorities have to waive the cap. This included settlement agreements relating to whistleblowing or discrimination cases. In addition, in certain ‘discretionary cases’ local authorities could seek permission from the Treasury to waive the cap. This included cases where the cap could cause undue hardship or inhibited workplace reforms.


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