The long foretold Government plans to introduce a £95,000 cap on the total pre-tax aggregate value of public sector exit payments are now coming into force with very little notice.
The Restriction of Public Sector Exit Payments Regulations 2020 were made (signed by the Minister) last night and come into force 21 days thereafter, being 4 November 2020.
The 4 November date is critical as if an exit occurs on or after that date, then the cap will apply, even if the terms were agreed beforehand (although in some limited specific cases, it may be possible to seek a discretionary waiver).
The Regulations introduce a £95,000 cap on the total pre-tax aggregate value of exit payments made to most types of public sector employees. The £95,000 cap will apply to the vast majority of public sector authorities and offices, details of which are set out in a lengthy schedule to the Regulations. The cap will apply to any non-exempt termination payments that represent a cost to the employer. This will include redundancy payments, employer pension contributions including any top up payments to fund a pension enhancement, ex gratia sums, voluntary exit payments, a payment in lieu of notice that exceeds one quarter of the employee's annual salary, as well as shares and share options.
Payments specifically excluded from the cap include death in service payments, injury compensation, pay in lieu of untaken holiday, payments made in compliance with a court order, and pay in lieu of notice that does not exceed one quarter of the employee's annual salary.
Any payments made pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement are also caught, but a special mandatory relaxation of the rule will apply in discrimination, whistleblowing, and health & safety detriment or dismissal claims.
Relaxation of the rules will also be applied to payments made as a result of TUPE and there will be a discretion to relax the rule if applying it would cause undue hardship or significantly inhibit workforce reform. The permitted relaxation of the rules will be set out in Mandatory HM Treasury Directions. While we have the 2019 draft of the Treasury Direction, the updated 2020 version (which is to include the health & safety detriment or dismissal claims) has yet to be published.
Where two or more public sector exits occur in respect of the same person within a period of 28 consecutive days, the total amount of the exit payments made to that person cannot exceed the £95,000 cap. The Regulations set out the sequence in which exit payments will be considered paid when applying the cap. Public sector workers will be obliged to disclose their departure and eligibility to an exit payment to any other interested or affected public bodies, for example those responsible for paying them as office holders.
While we now have the implementation date, we still await the final 2020 Guidance to accompany the Regulations. The Explanatory Memorandum to the Regulations states "updated guidance for applying the exit cap" will be published "alongside the coming into force of these Regulations".
The Regulations also have potentially significant pension implications. The early implementation date will disappoint those who hoped the implementation would be delayed until after the Ministry of Housing, Communities and Local Government consultation on the impact of the proposed reforms to exit payments made to local government employees that runs until 9 November 2020, see Redundancy and early retirement - difficult choices for LGPS members.