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Public sector exit payments and local authority restructuring

Sarah Lamont and David Kitson look at how public sector bodies can get ready for new regulations and guidance on exit payments.

A cap of £95,000 on exit payments in the public sector has been considered by the Government since 2015, but – following HM Treasury’s recent response to the consultation and publication of the new Restriction of Public Sector Exit Payments Regulations 2020 – the prospect of a ceiling on payments finally being introduced would seem to be much closer.

Currently, we are awaiting the final updated guidance and HM Treasury Directions, which will cover issues such as the circumstances in which the cap may or must be relaxed, and we do not know the precise date when the cap will be introduced. The draft Regulations provide for the cap to come into force 21 days after they are made but are subject to the affirmative procedure so will need to be approved by both Houses of Parliament first. However, we understand it is the intention that the cap will be in force for the end of the 2020 calendar year.

For public sector organisations, especially those involved in reorganization, or change management programmes, the cap is likely to have significant implications when there is a need for restructuring of management teams or other employees.

A schedule listing all public sector bodies covered by the cap is set out in a schedule in the Regulations and includes local authorities, maintained and academy schools, fire authorities, the Civil Service, NHS and the police. It is important that organisations that could be potentially affected should start planning and making preparations now.

Background

When public sector budgets are under pressure, there is concern when high-value exit payments are awarded. Media exposure and commentary has led to calls for tighter regulation. The Government is clearly of the view that many exit payments do not offer good value for money.

Following an initial consultation, it introduced new sections to the Small Business, Enterprise and Employment Act 2015 (via the Enterprise Act 2016) enabling the Treasury to make regulations imposing a £95,000 cap on public sector exit payments. In April 2019, the Government launched a consultation – and has recently responded to that and introduced the draft Restriction of Public Sector Exit Payments 2020. Although the £95,000 cap is unlikely to change (with no provision for it to be index-linked), the amount is being kept under review.

Responses to the consultation included large numbers of authorities in local government, the police and other emergency services.

Exit payments

Following consultation, the government has decided to no longer implement the cap in two stages and will instead capture the whole public sector as soon as possible, with few exceptions. It wants all payments related to exit to be within the scope of the cap including:

  • Redundancy payments
  • Payments made to reduce or eliminate an actuarial reduction to a pension on early retirement (known as pension strain costs)
  • Compensation under the ACAS arbitration scheme (other than those made in respect of discrimination and whistleblowing claims)
  • Severance payments
  • Payments made in the form of shares or share options on loss of employment
  • Payments made in lieu of notice under a contract of employment that exceed one quarter of the payee’s annual salary
  • Any other payment made as a consequence of loss of employment, whether under a contract of employment or otherwise

The Government says that it expects pension schemes, employment contracts, and compensation schemes to be amended in line with the introduction of the cap. If someone is involved in a public sector exit more than once within a 28-day period, the total payments made to that person in respect of those exits must not exceed the exit payment cap.

Exemptions (where higher amounts might be paid) include payments in respect of death in service, and incapacity as a result of accident, injury or illness. Other exempt payments include amounts in respect of annual leave not taken due under a contract of employment, contractual payment in lieu of notice (that does not exceed one-quarter of the relevant person's salary) and payments made in compliance with an order of a court or tribunal. If a statutory redundancy payment is included as an exit payment, that payment cannot be reduced, but, if the cap is exceeded, other elements that make up the exit payment must be reduced to achieve an exit payment of £95,000 or less.

Waivers

The Government says the waiver process has been designed to ensure there is accountability for the way waivers are used, therefore it’s appropriate that they receive ministerial clearance. The Regulations give powers to ministers to relax the cap in certain ‘exceptional’ circumstances, and where it is necessary or desirable’. In the case of local authorities, power to relax the cap has been delegated to full council. The Government will provide more detail in the updated guidance and HM Treasury Directions which are awaited.

There are some circumstances where a waiver will be mandatory; including where the obligation to make the exit payment arises as a result of a TUPE transfer, or in discrimination and/or whistleblowing where it’s likely an Employment Tribunal would award a higher amount. This will also be extended, following the consultation, to include claims for, unfair dismissal or health and safety related detriment.

In addition, the minister (or person acting on delegated authority) has discretion to relax the cap in certain circumstances. But there is still considerable uncertainty as to how the proposed waiver would work in practice. The Government will provide more guidance soon, however employers will probably need to have a legal view on specific cases, including the mandatory waivers, once the cap comes into force.

Until further documents and full guidance are available, it is hard to know how the waivers will apply, what impact they will have and how they will link with the current requirement to obtain Treasury approval.

Local government restructuring

A large number of local authorities are currently involved in restructuring plans. This is driven by a number of factors including pressure on budgets and funding, devolution, the increased decisions for unitary authorities and an end to two-tier systems, as well as the current COVID-19 health emergency. Where councils want a new combined authority with an elected mayor to regenerate and get devolution deals, the authorities in the area need to consider unitarisation.

In particular, local government is waiting for a devolution and recovery White Paper in the Autumn that is expected to provide the Government’s view on the optimum population size per authority. The Local Government minister Simon Clarke has talked about a “10-year roadmap for new mayors”, and “a clear path for leveling up every region of the country”, that might see many district authorities being unable to continue in their current structures.

With change clearly on the way for many authorities, there is a window of opportunity now to be looking ahead, starting succession planning and how likely restructuring will be linked the new system of public sector exit payments.

Sarah Lamont is a partner at Bevan Brittan LLP. She can be reached This email address is being protected from spambots. You need JavaScript enabled to view it. or telephone at 0701948943. David Kitson is a senior associate at Bevan Britan. He can be reached This email address is being protected from spambots. You need JavaScript enabled to view it. or telephone at 0701945464.