Public sector exit payments cap

Legislation capping public sector exit payments at £95,000 comes into force on 4 November 2020.

In 2015 the government passed legislation enabling it to make regulations to impose such a cap but progress on it was much delayed. In 2019 a consultation was published, to which the government responded in July 2020. We now have the final version of the applicable regulations – the Restriction of Public Sector Exit Payment Regulations 2020 which come into force on 4 November 2020. The regulations do not appear to be subject to any transitional provisions, which would suggest that the cap will apply to all exit payments made on or after 4 November, regardless of any prior negotiations or contractual agreements between employers and employees. Further guidance has been promised before the regulations come into force. In summary:

  • The £95,000 cap applies across the whole of the public sector to the total sum of payments made in ‘a relevant public sector exit’. 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 individual cannot exceed the £95,000 cap.
  • The cap will generally apply to all payments relating to an exit, including the following payments:
    • redundancy
    • compensation
    • a severance package
    • a voluntary exit
    • pay in lieu of notice that exceeds one quarter of the employee’s annual salary
    • any payment to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost to a pension scheme of such a reduction not being made (commonly known as ‘pension strain costs’) and
    • ‘any other payment, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office
  • 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 an employee’s annual salary
  • A relaxation of the rule will likely apply to payments made as a result of TUPE and in discrimination, whistleblowing and health and safety detriment or dismissal claims.

The exit cap proposals should not be confused with the power to recover public sector exit payments if the person to whom the payments has been made (and whose earnings are at least £80,000) returns to the public sector within 12 months. These individuals will be required to pay back some or all of the exit payment associated with their former public sector employment. The regulations will only apply to those who’ve both left and become re-employed in relevant public sector employments, on or after the effective date that the regulations come into force.