In November 2020, The Restriction of Public Sector Exit Payments Regulations 2020 (SI 2020/1122) (the Regulations) came into force. The aim of the Regulations was to ensure that “Public Sector exit payments are fair and proportionate to employers, employees and taxpayers” and, in particular, to bring an end to what many considered to be extortionate, six figure exit payments for public sector workers.
However, within three months of these Regulations taking effect, the Government has executed an extraordinary U-turn by announcing this month, that the Regulations are to be dis-applied pending their formal revocation. The question is, why?
The Regulations were intended to implement a cap of £95,000 (the Cap) on public sector exit payments. They defined “exit payments” very widely to include redundancy payments, compensation payments agreed through ACAS or a settlement agreement, severance or ex-gratia payments, shares or share options, voluntary exit payments, a payment in lieu of notice (in excess of three months) or any other payment in consequence of termination of employment or loss of office, whether under a contract of employment or otherwise. Furthermore, the Cap continued to apply if the same person had two or more public sector exits within a 28 day period.
The Regulations, however, faced a lot of criticism, during both the consultation period and following their implementation. In particular, a number of concerns were raised regarding the relationship the Regulations had with contractual entitlements and did not clarify what would happen if a contractual provision exceeded the Cap.
The Government’s intention in this respect was that the Regulations would be implied into employment contracts and would take precedence over any existing contractual provisions. This would mean that employers would not be required to amend any contractual provisions that were incompatible with the Regulations. However, this was not explicitly provided for in the Regulations and exposed public sector employers to the risk of claims for breach of contract.
For example, the Cap could prevent an employer paying out a contractual redundancy payment. Yet, if the employee subsequently submitted a breach of contract claim (which they would be entitled to do, in the absence of their contract being formally varied to account for the Cap) against their employer, the employer would not be able to settle outside of court because of the Cap but would be permitted to make a payment in excess of the Cap via a Court Order.
This of course has led to a perverse set of circumstances, whereby Regulations designed to protect tax payers’ money, risk wasting that money litigating unnecessary cases.
It is this inconsistency that has led to the demand for a judicial review of the Regulations and the Government’s concession that they “may have had unintended consequences and…should be revoked”.
Next steps
In light of the Regulations being revoked, public sector organisations should consider the following:
- The H M Treasury guidance is encouraging individuals whose exit payments were affected by the Cap whilst it was in force (from 4 November to 12 February 2021), to contact their former employers. They are encouraged to seek the full amount that they should have received, had the Cap not been applied.
- Public sector organisations should therefore consider whether they made an exit payments in the last three months, which were subject to the Cap. If so, they should be prepared to be contacted by the former employees, reconsider the exit payment and pay any additional sums accordingly.
- Public sector organisations are also “encouraged” by the HM Treasury Guidance to pay the full amount the former employee would have been owed had the Cap not applied. Contesting a request from a former employee, therefore, may open the organisation to criticism.
The HM Treasury guidance states that “HM Treasury will bring forward proposals at pace to tackle unjustified exit payments”. We can therefore expect further developments in this area but have no indication as to when this may be.
