May 2016 saw the Enterprise Act 2016 be passed by the UK Parliament.
From an employment perspective, one of the key provisions of the Act is to address the perceived large payments made to outgoing public sector employees by capping such payments at a maximum of £95,000. The law is due to come into effect from October 2016.
We’re still waiting to see the detail of the proposed underlying legal provisions, but the Government has published “draft” Public Sector Exit Payments Regulations 2016 on the topic which gives us an idea of what the final position is likely to be. They are not to come into force prior to 1 October 2016.
The payment cap is likely to apply to redundancy and voluntary exit payments, as well as payments made to reduce or eliminate any effect an early departure would have had on an individual’s pension. However, it may also catch other payments made in consequence of loss of employment, including payments in lieu of notice. The effect of this could be significant -–how will an employer deal with an employee whose existing contractual PILON entitlement exceeds the cap? The cap could therefore limit an employer’s ability to use termination payments to resolve a “problem”.
It seems it will be possible for the cap to be waived, but it would require the consent of the relevant government Minister or, in the case of local government, the full council. Such decisions are likely to attract considerable media attention which may limit their number.
The Government has just finished consulting on other proposals that might form part of the eventual law. This included setting a “mini-cap” on calculating exit payments at three weeks’ pay for each year of service, and limiting the maximum number of months’ salary that can be used when calculating redundancy payments to 15 months. Where an individual is close to their retirement age anyway, there is likely to be a greater effect upon the reduction in the potential level of any exit payment.
While the headlines have concentrated on the maximum cap of £95,000, these other proposals could significantly affect any public sector worker whose employment is terminating.
One thing that has been consulted upon previously and may form part of the eventual regulations relates to the possibility of a “clawback” of an exit payment if the individual returns to work in the public sector within a year of leaving. The details of any such scheme are yet to be seen.
For Scottish Colleges and Universities the main issue is whether this provision will apply to them. On a reading of the Act it would appear that they will not and it will be for the Scottish Government to publish regulations to apply in Scotland under their devolved powers. However the SFC Financial Memorandum for each sector already sets out the restrictions on such payments and on severance schemes more generally.
Colleges: the SFC Financial Memorandum requires such payments to comply with the SPFM with any severance schemes needing to be approved by the SFC.
Universities: institutions must have a clear policy on severance payments with a maximum threshold being set by the governing body. Any payments over the maximum threshold the SFC’s Accountable Officer has to be consulted before any such payment is approved.
Given recent adverse publicity concerning exit payments such payments will continue to be put under considerable media scrutiny and it is important that robust governance arrangements in the setting up of such schemes are followed, particularly where any payments are proposed to those in senior management positions, who are likely to have fairly lengthy notice periods already in their contracts of employment.
Overall, whilst the main likely provisions of the exit payment cap appear to be clear, the final draft Regulations will give us the fine detail and we will keep you informed when they are published as to their application to the sector.
Noele McClelland is a Partner and Employment Law specialist. We are always delighted to talk without obligation about whether we might meet your needs. Call Noele or a member of the Employment team on 01382 229111