Public sector exit payments: the need for more approvals

The long-awaited cap on exit payments in the public sector came into force on 4 November 2020. Its effect is to prohibit almost all public sector employers from making payments of more than £95,000 to employees in connection with the termination of their employment.

The cap is intended to apply across the whole of the public sector and the legislation contains a schedule which lists all organisations that are covered. It includes the NHS, professional regulatory bodies, local councils, government departments and most other publicly funded bodies.

The cap covers most types of payments that may be made to an employee when exiting an organisation including redundancy payments, payments into a pension fund, any severance or ex-gratia payments, payments to buy out a fixed-term contract, payments to settle a dispute, and payments in lieu of notice in excess of ¼ of the annual salary.

There is provision for the cap to be “relaxed”, but crucially this will only apply in limited circumstances and will almost always require an external approval process. Whilst local authorities and fire and rescue authorities can (subject to an internal approval process) relax the cap themselves, other public sector organisations (including the NHS) will always need to seek permission externally.

The exit payments guidance suggests that the relaxation of the cap is expected to be granted only in exceptional circumstances, but there are certain circumstances where the cap must be relaxed even though external approval is still required. These include:

• Where the obligation to make the exit payment arises as a result of the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”); or
• in respect of complaints for discrimination, health and safety or whistleblowing detriment/dismissal, and where that claim is likely to succeed (leading to an award of compensation) if it proceeds in the Employment Tribunal.

In these circumstances, the employer (unless it is a local authority or fire and rescue authority) must submit a business case for approval to their sponsoring department and the relevant Minister.

There are also circumstances where the cap may be relaxed, where:

• capping the payment would cause undue hardship;
• it is necessary for urgent workforce reform; or
• there was a written agreement in place before the cap came into force and it was intended that the employee would leave before this date, but their exit was delayed for reasons outside their control.

In these circumstances, the employer (again, unless it is a local authority or fire and rescue authority) must submit a business case for approval by their sponsoring department, the relevant Minister, and then HM Treasury. The HM Treasury guidance includes a proforma for setting out the business case, and notes that decisions may take up to four weeks.

In addition to these approval requirements, there are also specific rules about record-keeping when decisions to relax the cap are made and certain details must be published in the organisation’s annual accounts.

Given the potentially cumbersome and lengthy process for relaxing the cap, despite it being mandatory to do so in certain circumstances, it will remain to be seen how employers will approach difficult situations which are affected by the cap such as complex restructuring and whistleblowing claims going forward. The need for HM Treasury approval before making special severance payments to employees pursuant to the Managing Public Money guidance remains in place, so it is now even possible that two separate approvals could be required for the same circumstances.

Contact us if there is any doubt as to whether and what type of approval might be required, or you require assistance with seeking that approval.

Note this article only summarises the rules in England. There are different arrangements in Scotland and Wales.