Public Sector Exit Payments - the £95k cap

On 14 October 2020, the Government introduced the Restriction on Public Sector Exit Payments Regulations 2020 (SI 2020/1122) which came into effect on 4 November 2020. These Regulations prevent public bodies from paying exit payments in excess of £95,000.

The Regulations capture a very broad range of public bodies from government departments to NHS trusts although there are some publicly-funded bodies which are not caught including universities and further education colleges.

"Exit payments" are payments made to employees on the termination of their employment or office holders who leave office, normally in a redundancy scenario. No transitional period has been provided for in the Regulations meaning that if an exit payment is made on or after 4 November 2020, the cap will apply regardless of whether terms were agreed or exit occurred before that date.

Various types of payments count towards the exit cap including redundancy payments, compensation sums under settlement agreements, payments in lieu of notice that exceed one quarter of the employee's annual salary, shares and share options and "pension strain" payments (i.e. additional employer pension contributions that enable an employee to take early retirement on an unreduced pension).

While these regulations were designed to reduce the level of payments being made to high earning senior employees, the result is that thousands of staff with decades of service could be caught by the new law as the £95,000 calculation will include a payment employers make to pension funds to ensure that long-serving staff do not receive reduced pensions. UNISON has called for the Regulations to be urgently reformed as the cap will blight the retirement of low and middle income employees.

Payments which are excluded from the cap include awards made by a court or an employment tribunal. While the regulations prohibit the relevant public body from making payments in excess of £95,000 (effectively overriding any employment contractual obligations which would see the employee receive in excess of the cap) they do not alter an employee's entitlement to payments in excess of this amount. As such, where an employee is entitled to a payment under their employment contract or legislation, they will be forced to resort to litigation to try to recover their entitlement. It is for this reason that the British Medical Association has sought permission to judicially review the Regulations.

Other payments which do not count towards the exit pay cap include death in service payments, payments for accident, injuries or illness and payments in lieu of holiday.

Where an employee receives exit payments from two or more authorities within 28 days, the cap will apply to the total of those payments although there are specific rules to follow where that is the case.

Power has been granted to ministers to waive or "relax" the cap in certain cases and local authorities also have this power so long as they act in accordance with the Treasury Directions or with consent from the Treasury. In certain "mandatory cases" such as whistleblowing or discrimination case, local authorities have to waive the cap. It is only in "discretionary cases" such as where the cap would cause undue hardship or inhibit workplace reforms, where the local authority would have to seek permission from the Treasury to waive the cap.