Public sector exit pay cap has been revoked

Regulations introduced in November 2020 have been scrapped due to ‘unintended consequences’

The Restriction on Public Sector Exit Payments Regulations 2020 came into force on 4^th November 2020 and set a £95,000 cap on exit payments for staff in public sector organisations, including local government, fire services and schools (including academies).

The regulations had originally been brought in to tackle the perceived issue of high earners in the public sector receiving significant, and sometimes repeat, severance payments only to be soon re-hired into a senior position elsewhere and to ensure prudent use of public money.

Concerns were raised by employment lawyers and unions during consultations with the government that the proposed cap of £95,000 would catch a much broader range of public sector workers. The cap was to be applied to pension entitlements, which, when combined with redundancy and notice payments, meant that a broad group of workers risked exceeding the £95,000 cap. 

A guidance document published by HM Treasury in February 2021 has revoked the cap on exit payments with immediate effect. A government review of the cap concluded that it may have had ‘unintended consequences’, without specifying what these are.

The HM Treasury guidance stressed that it was still vital for exit payments in the public sector to deliver value for taxpayers and that employers should always consider whether exit payments are fair and proportionate.

The guidance also encourages employees who have been affected by the cap to approach their former employer directly and encourages those employers to pay affected employees any sums that they would have been due had the regulations not been in place.

Comment

The revocation of the cap barely four months after it was introduced poses a significant headache and financial drain for public sector employers who may now face the need to rectify exit payments made to recently departed employees.  On the other hand, revocation recognises the potential impact on public sector staff, with unions highlighting that the cap would affect staff on annual salaries from £25,000 and the broad issues this might create for public sector staff morale and confidence.

Despite the revocation of these regulations, HM Treasury’s guidance suggests that the issue has not gone away and that fresh attempts will be made to tackle the perceived problem of ‘unjustified exit payments’.