Update: cap on public sector exit payments takes effect next month

Regulations implementing the £95,000 cap on public sector exit payments were made on 14 October and take effect on 4 November.

The Regulations apply to most public sector organisations (including NHS bodies, local authorities and Central Government) as well as some arms-length bodies and cultural institutions. The full list of organisations to which the new cap applies is set out in the schedule to the Regulations.

There a number of complexities, particularly around pensions, but the broad picture is as follows:

  • As well as covering all ex-gratia payments, the cap will extend to contractual entitlements on termination of employment, with the exception of notice pay (capped at 25% of salary) and accrued holiday pay
  • Statutory redundancy payments and payments to compensate for injury or illness (including injury to feelings) will be exempt
  • The value of any entitlement to an unreduced pension on early retirement will also be captured (these benefits ceased to apply in the NHS from March 2015)
  • There are record-keeping and reporting requirements to support the obligation to apply the cap
  • There is power to apply for a relaxation of these new rules in certain circumstances – for example where applying the cap would cause hardship. More details will be set out in a treasury direction which is expected to be published shortly

There are no transitional provisions in the Regulations, so it appears that they will apply to payments made on or after 4 November, even if they are made pursuant a legally binding agreement that was entered into prior to that date.  

Indeed the way the Regulations interact with employers' contractual obligations is a matter of some controversy, particularly when it comes to long-standing pensions obligations (for example in the local authority sector). The Government appears to be of the view that the Regulations take precedence over any contractual obligations that conflict with them, but this issue may soon be tested in the courts.

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