Resurrection of Consultation on Public Sector Exit Payments


The government has recently launched a consultation on draft Restriction of Public Sector Exit Payments Regulations 2019 and associated draft guidance, which resurrect plans to introduce a £95,000 cap on exit payments in the public sector.

It first consulted on introducing a cap in late 2015, which was followed by the publication of the draft Public Sector Exit Payment Regulations 2016. However, those regulations were never made. They are now back on the agenda.

The Cap – what’s included?

The draft regulations propose that the following payments will be subject to the cap:

  • Any payment as a result of dismissal by reason of redundancy (but with exceptions in respect of statutory redundancy payment entitlement).
  • Any payment made to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost of a pension scheme of such a reduction not being made. However, the cap would only apply where there is an extra cost to the employer as a result of the employee’s exit. Therefore, payments that arise from accrued pension rights would not be exit payments for purposes of the cap. However, a top-up payment (often referred to as a ‘pension strain payment’) paid by an employer, which results in the person getting a greater pension than they would otherwise be entitled to, would be restricted by the cap.
  • Compensation payments made as a result of an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement (NB there are special rules with regards to discrimination and whistleblowing claims.
  • Any severance payment or ex gratia payment or any payment on voluntary exit.
  • Any payment in the form of shares or share options, or to extinguish any liability under a fixed-term contract, or any other payment made (whether contractual or not) as a result of termination of employment or loss of office.
  • Any payment in lieu of notice due under a contract of employment that exceeds one quarter of the employee’s annual salary.

The Cap – what’s not included?

The following payments are not considered ‘exit payments’ under the draft regulations and therefore are not proposed to be subject to the cap:

  • Any payment made in respect of death in service.
  • Any payment made in respect of incapacity as a result of accident, injury or illness (but this would not including injury to feelings).
  • Certain payments made under various firefighter pensions rules and certain payments in the judiciary.
  • Any payment made in compliance with an order of any court or tribunal.
  • Payments made in respect of annual leave due under a contract of employment which has not been taken.
  • A payment in lieu of notice due under a contract of employment that does not exceed one quarter of the person’s annual salary.

Mandatory relaxation of the cap – discrimination, whistleblowing and TUPE

The Treasury has issued a mandatory direction requiring relaxation of the cap in the following cases:

  • Where the obligation to make the exit payment arises as a result of TUPE.
  • Discrimination and whistleblowing claims, where the minister (or person acting on delegated authority) is satisfied that an employment tribunal would uphold the claim and award compensation.

Discretionary relaxation of cap

A minister has discretion to relax the cap where they are satisfied of one of the following exceptional situations:

  • Not exercising the power would cause undue hardship.
  • Not exercising the power would significantly inhibit workforce reform.
  • An exit agreement was made before the regulations come into force and (1) it was the intention of both parties that the exit would occur before that date and (2) any delay to the date of exit was not attributable to the employee.

Nothing much has changed from the first consultation

The new draft regulations are pretty much the same as those published three years ago. One significant difference is that payments made in lieu of notice that do not exceed one quarter of the individual’s salary would not be included as part of the cap.

Also, the new draft regulations do not appear to say that an entitlement to an exit payment exceeding the cap would be unenforceable. As such, it seems possible that a public sector employee might be able to enforce a contractually agreed settlement payment in full, even if it exceeds the cap, although this seems to be a peculiar anomaly that might be rectified following the consultation process.

The consultation on the proposed draft regulations remains open until 3 July 2019, so watch this space.

Darren Tibble, Partner

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