Cap on public sector exit payments back on the agenda

The Government is going ahead with plans to prevent public sector employers paying exit or severance payments of more than £95,000. The cap affects maintained schools, academies and other public sector employers such as the Civil Service, the NHS, police forces and local government. The cap will apply to both existing and new employees.   

The detail is contained in draft regulations and guidance which the Government is consulting on. It has not given an indication of the intended implementation date.

What counts as an exit payment?

Payments subject to the cap are wide ranging and include:

• Redundancy pay 
• Payments in lieu of notice if they are more than 25% of the employee’s annual salary.  Salary for these purposes includes contractual benefits in kind  
• Any other payment made on termination, whether made under the employment contract or otherwise.  This includes paying out a fixed term contract and payments to top up an employee’s pension, as well as payments in the form of shares or share options  

What doesn’t count as an exit payment?

The following are not exit payments and so are not subject to the cap:

• Death in service benefits
• Payments for incapacity 
• Pay in lieu of untaken holiday  
• Payments made to comply with a court or tribunal order

Are there any exceptions?

The cap will be relaxed in cases of discrimination and whistleblowing if an employment tribunal would be likely to uphold the claim and award compensation. The Minister (or person acting on delegated authority) must be satisfied of this and the guidance indicates that the employer will be expected to provide legal advice to this effect.  

The cap will also be relaxed where the payment is made as a result of TUPE applying.   

In rare cases, the Minister (or person acting on delegated authority) may also agree to relax the cap if they are satisfied that:

• Imposing the cap would cause undue hardship or significantly inhibit workplace reform
• Terms of departure were agreed before the legislation comes into force but the exit is delayed until after that date through no fault of the employee.  This could apply where the employer asks the employee to stay to complete a critical business project.   

Responses to the consultation must be provided by 3 July.