June 24, 2016

Will the new payment cap ‘fit’ the public sector?

The government plans to introduce a cap on public sector exit payments this autumn. Draft regulations set out the proposed £95,000 cap in November 2015, but implementation has only just been set for October 1 2016. The government will issue guidance on how the cap will operate.

Why is the government introducing the cap? It says six-figure public sector exit payments have to end because such payoffs far exceed the payments received by most public sector workers. In fact, they exceed payments received by the majority of the general workforce. On that basis, such payments are neither fair, nor give taxpayers good value for money.

How big is the problem of mega public sector exit settlements? According to government figures, almost 2,000 public sector employees enjoyed payouts of more than £100,000 in 2014/15. Furthermore, between 2011 and 2014, the bill for public sector exit payments was substantial – around £6.5 billion.

The initial proposal for capping exit settlements was published in the Enterprise Bill 2015, which has since become an Act, and in the draft Public Sector Exit Payment Regulations 2016.

HR needs to know which payments these caps apply to. As it currently stands, the £95,000 cap will pertain to total composite value of most public sector exit payments over a 28 day period. Those payments are:

– redundancy and voluntary exits
– to end a fixed-term contract
– in shares on loss of employment
– to reduce or eliminate an actuarial reduction to an early retirement pension
– any other payment, contractual or otherwise, made as a result of loss of employment – eg. payments in lieu of notice

The cap regarding the actuarial reduction to an early retirement pension could substantially effect severance payments overall.

What payments does the cap not apply to?

– incapacity or death as a result of accident, injury or illness
– accrued holiday that has not been taken
– as a bonus
– damages ordered by a court
– fire fighters for early retirement
– employees with protected terms following a TUPE transfer

In exceptional circumstances, the cap can be lifted but organisations would have to follow due process. That process necessitates the organisation gaining the consent of a minister of state or from the full council in the case of local authority exit payments. Information regarding the lifting of the exit payments cap would have to be published annually – that it is happened and why it was deemed necessary – and this information would need to be kept for at least 36 months.

Also, if a public sector employee is the recipient of an exit payment and they continue to be an employee of the public sector then it is incumbent on them to provide their new employer with certain information. They need to notify their new employer that they have received an exit payment, how much they received, the date they left that employment and what public sector authority made the payment.

A number of employers are exempt from the regulations – the armed forces, the Financial Conduct Authority and the BBC, for example.