The draft Restriction of Public Sector Exit Payments Regulations 2020 (“the Regulations”), capping public sector exit payments at £95,000, have now been approved by Parliament, and will come into force on 4 November.

The cap of £95,000 imposed by the Regulations:

  • will apply across the whole of the public sector;
  • will apply to the total sum of payments made in a “relevant public sector exit” (which is defined as an individual leaving the employment of a public sector employer); and
  • will also apply to the total amount of all relevant exit payments made to an individual where two or more relevant exit payments  occur within any period of 28 consecutive days (so the total of all the relevant payments within that period must not exceed the cap).

The cap will generally apply to all payments (with some exceptions for payments that are not strictly exit payments such as payments in lieu of annual leave or any payment in compliance with a court or tribunal order) relating to an exit as a whole, including the following payments:

  • redundancy;
  • compensation;
  • a severance package;
  • a voluntary exit;
  • pay in lieu of notice;
  • 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 (commonly known as “pension strain costs”); and
  • “any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office”.

The Regulations do not appear to be subject to any interim or transitional provisions, which would suggest that the cap will apply to all exit payments made on or after 4 November, regardless of any prior negotiations or contractual agreements between employers and employees. However, it is to be hoped that the Government guidance and HMT Directions, which are anticipated in advance of the Regulations coming into force, will shed some light on how the cap will apply where an employer has already reached severance terms with an exiting employee, which may breach the cap.

In terms of planning for the changes, employers do not have much time before the implementation date to ensure that any contractual redundancy and pension quotes obtained before the cap comes into effect are accurate, or to be clear about which elements of the exit payments can still be paid. Employers are therefore encouraged to identify any planned redundancies, retirements or agreed exits that may be affected by the Regulations and seek early legal advice and input from their pension providers on the potential impact of the changes.

In the meantime, the British Medical Association (BMA) is seeking to challenge the Government’s decision to impose the cap through the regulations. The BMA submitted an application for permission to apply for judicial review on 15 September 2020 on the basis that the cap and the regulations are unlawful. The outcome of the application is still awaited.

The Regulations can be found here.

How Capsticks can help

Capsticks has significant experience in advising on the issues arising out of termination of employment in the public sector, including drafting policies and procedures, advising on the approval process and drafting and negotiating termination arrangements for departing staff. For further information please get in touch with Victoria Watson, Alistair Kernohan or Chloe Edwards.