Public sector exit payments: the new rules

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5 min read

As from April, new claw back provisions will apply to exit payments made to higher paid public sector workers. Separate proposals to impose a financial cap on all public sector exit payments are already far advanced.

Overview

There are two separate sets of provisions which can be summarised as follows:

  • As from April 2016, public sector workers earning at least £80,000 will be subject to new rules about the repayment of their exit payments if they get a new public sector job within a year.
  • All exit payments will be capped at £95,000, which includes almost all payments made on the termination of the contract. The Government has not yet announced the implementation timetable, but if the legislation is not ready in April, it is likely to become effective later in 2016.

Claw-back rules

The following are the key provisions extracted from the final draft of the regulations published in December 2015. It is possible that further last minute changes will be made before they are laid before Parliament.

  • The new rules will apply to exit payments made by public authorities to employees earning at least £80,000 pa.
  • The obligation to repay is triggered if the recipient gets a new position in the public sector – which can be employed or self-employed – within a year of the date their previous employment ended.
  • There will be a comprehensive list of all the public sector organisations to which these new provisions will apply in a schedule to the regulations. They will apply to all local authorities, central government organisations and NHS bodies as well as most publicly funded schools and a number of quasi-governmental bodies. They will not apply to universities, nationalised banks or public service broadcasters.
  • Repayment will be on a sliding scale, depending on what proportion of the year has elapsed. A further adjustment will be made if the new job has fewer standard weekly hours than the old one.
  • Not all the elements in these exit payments are subject to claw-back. Payments in lieu of notice or in respect of accrued holiday pay will not be caught. However most other elements will be included, including contractual redundancy payments, voluntary severance payments and payments made by the employer to reduce actuarial reductions in pensions on early retirement.
  • It appears that in any event the employee will be entitled to retain the equivalent of the statutory redundancy payment, though the regulations are not wholly clear on this point.
  • There are comprehensive record keeping and notification provisions.
  • Recipients will not be able to start their new job until “relevant arrangements” have been made with the former employer to repay the money. If the recipient fails to honour these arrangements, the new employer is expected to consider dismissing the recipient. If the new employer decides not to dismiss, its reasons must be recorded.
  • Ministers and local authority councils will have power to issue a waiver of the requirement to repay. Ministers are required to exercise these powers in accordance with any written directions issued by the Treasury.

Exit payments cap

The proposals for an overall cap on exit payments have not been refined in so much detail. What follows is a broad outline of what is currently proposed, based on the consultation draft of the regulations published in November 2015.

  • The amount of the cap will be set at £95,000. Most payments made to a public sector employee as part of an exit package will be in scope.
  • Payments in respect of accrued holiday pay and contractual bonus payments will not count towards the cap. However, despite lobbying, the Government has insisted that all other contractual payments, including pay in lieu of notice, should count towards the cap.
  • The Government has so far declined to make any exceptions for long-serving employees, or to exclude the cost to the employer of providing an early unreduced pension from the calculation. However contractual exit payments made to employees with protected TUPE terms will be exempt from the cap.
  • Although there is no mention of this in the response to consultation, the draft regulations state that regardless of the other restrictions on the amount of the payment, an employee will in any event be entitled to receive a statutory redundancy payment or its equivalent.
  • As with the claw-back provisions, there will be a waiver process for exceptional circumstances and similar record keeping obligations will apply.
  • Although the precise details have not been published, it is likely that the cap will apply to the same range of organisations as those that will be subject to the claw-back regulations.

Relationship with existing rules and arrangements

In both cases the new rules will apply in addition to any current rules about repayment of exit payments, or regulating the maximum amount of severance payments. The Government states that the aim of these new regulations is to set out minimum requirements, with individual employers able to agree more stringent restrictions with their workforce.

However in many cases the new rules are likely to clash with contractual obligations currently owed to public sector employees, whether under their individual contracts of employment, under collective agreements or under the rules of the pension scheme they belong to. It seems that the regulations are intended to over-ride contractual obligations, but we believe that further regulations will be required to modify any pension scheme rules that are inconsistent with the cap.

Practical implications

There are likely to be a number of practical difficulties ahead:

  • Enforcing the clawback provisions is likely to cause friction between the former employer and the new employer, since their interests are likely to clash. The former employer will wish to ensure that it complies with its obligations to claw-back the payment, while the new employer will wish to remove any obstacles to recruiting its chosen member of staff.
  • Clawback will be particularly difficult to enforce where the employee is expected to pay back the cost of providing an early unreduced pension, since this does not reflect money the employee will have actually received.
  • While the clawback regulations will only affect relatively highly paid employees, there is no similar restriction on the application of the cap. That has the potential to catch long-serving employees on relatively low grades, in effect depriving them of some of their contractual redundancy entitlement. Similar difficulties will arise where such employees are entitled to an unreduced pension on early retirement.

Further information

Further information about the proposals can be accessed via the following links:

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