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On 4 November 2020, the Restriction of Public Sector Exit Payment Regulations 2020 came into force (Regulations).
The Regulations imposed a £95,000 cap on the amount that public sector bodies could pay to employees on the termination of their employment. This was introduced with the intention of preventing excessive pay-outs to high-earners within the public sector.
The payments which would fall within the scope of the £95,000 cap include:
- Redundancy payments
- Severance payments
- Pension strain payments
- Compensation payments through ACAS
- Payments made as a consequence of loss of employment, whether under a contract of employment or otherwise
- Payments made in lieu of notice under a contract of employment that exceed one quarter of the payee’s annual salary
The total of all exit payments falling within the scope of the cap could not exceed £95,000.
What was the response to the Regulations?
A key point of contention with the new Regulations surrounded the unintended impact that they had on ordinary earners within the public sector. In particular, the Regulations had the potential to conflict with the current local government pension scheme (LGPS). To summarise, the LGPS rules currently state that members over 55 must receive an unreduced pension if they are made redundant. Controversially, the Regulations had the potential to restrict this, which could have meant that long-serving staff over the age of 55 and facing redundancy would have received less money.
We discussed the conflict between the Local Government Pension Scheme and the Regulations in our recent article here.
Unsurprisingly, several unions objected to the effect of the Regulations and argued that they would impact ordinary workers in ways which were not intended by the Government. Various unions brought judicial review claims challenging the legality of the Regulations, which were due to be heard at the end of March 2021.
However, after an extensive review of the application of the cap, the Government has agreed that the cap may have had unintended consequences. As such, it has decided that the Regulations should be revoked. An HM Treasury Direction has been published that will dis-apply the cap in the interim.
What does this mean for employers who were impacted by the Regulations?
The Government has published guidance stating that any employee who was affected by the cap while it was in force should request the relevant payment that he or she would have received had the cap not been in place, by contacting his or her former employer directly.
As such, employers that made termination payments to employees who were restricted by the cap may expect to hear from them shortly.
The Government is encouraging employers to pay to any former employees, to whom the cap was applied, the additional sums that would have been paid but for the cap. Therefore, it appears, from the Government’s announcement, that it will not be mandatory to do so.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact Rachael Lloyd to discuss any issues you are facing.
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