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Legislation passed introducing cap on exit payments to public sector employees

On 14 October 2020, Parliament approved 'The Restriction of Public Sector Exit Payments Regulations 2020,' (the Regulations) in a long-anticipated move to restrict the amount public sector employers can pay their employees on termination of employment. The Regulations are intended to come in to effect on 4 November 2020 and a significant question for many employers in the public sector will now be how this affects them in practice and what payments fall under this restriction?

The Regulations have introduced a cap of £95,000 on exit payments for employees leaving employment or vacating office. They apply to a 'relevant authorities' and confirm that they must not make an exit payment which exceeds the new statutory cap. For the purposes of the regulations, the term 'relevant authority' encompasses most schools, social housing providers and local authorities, meaning a variety of different sectors will be affected by these changes.

The cap applies to a number of payments including those made by way of redundancy, ex-gratia payments or payment in lieu of notice, payments to settle Tribunal proceedings, payments made in compensation for loss of office and payments made in respect of early release of an employee's pension (commonly known as pension strain). Notably, the cap does not apply to payments in respect of death in service, accident/ injury or accrued but untaken holiday. A further caveat to the Regulations is that payment in lieu of notice will not fall under the cap, if it does not exceed one quarter of the employee's salary.

We anticipate this legislation having a significant impact on employers' policies and procedures and the way in which they manage an employees' exit from their business. Most public sector employers offer favourable enhancements on severance payments, such as redundancy pay, which in turn increases the amount an employer may have previously offered in a settlement agreement. In addition, we anticipate many employers being taken up to or above this cap, due to the need to include any pension strain, within their calculations.

To ensure compliance, it is likely that many public sector employers may need to consider the package they offer employees and look at potential amendments to any relevant policies. Organisations covered by the cap may also want to consider whether they can bring forward any proposed plans that might be affected by the cap so they take effect before 4 November 2020. For agreements which have already been agreed but have not yet taken effect, we would expect guidance to be issued before the cap comes into effect which we would hope deals with these types of situations.

If you would like some further clarification on the Regulations and the impact this will have on your organisation, please contact the Public Sector Employment team at Forbes.

For more information contact Ruth Rule-Mullen in our Public Sector department via email or phone on 01772 220195. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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