New cap on exit payments could lead to legal disputes

7 Dec 2020, 5:00

Around a third of Department for Education funding linked to Covid will be from underspends or existing budgets, according to the Institute for Fiscal Studies.

Regulations are about to be introduced that represent a substantial change to schools’ employment practices, write Jenny Arrowsmith and Joanne Moseley

The Restriction of Public Sector Exit Payment Regulations 2020 are now in force. These impose a £95,000 cap on the amount public sector bodies can pay to an employee when their employment comes to an end.

The organisations that have to comply with the cap are set out in a schedule that separates England, Wales and Scotland. The list is laid out in alphabetical order and covers virtually all publicly funded schools. In England and Wales this includes academies (including non-maintained special schools), community and special schools, pupil referral units, maintained nursery schools, voluntary controlled schools and foundation schools (including foundation special schools).

The regulations set out a number of payments that count towards the £95,000 exit payment cap. These include redundancy payments, severance payments, payment in lieu of notice (but see below for further information on PILONs), settlement agreements and, controversially, “pension strain” payments (i.e. additional employer pension contributions to enable an individual to take early retirement on an unreduced pension). The total of all exit payments cannot exceed £95,000.

The Local Government Pension scheme rules haven’t been changed to accommodate the cap

The inclusion of pension strain contributions potentially causes a huge problem for employers because it’s not unusual for these to be in excess of £100,000 (even for middle-ranking staff) before you even add in any of the other payments they may receive on termination. Many pension schemes haven’t yet been amended to cap payments at a level that allows them to comply with the £95,000 limit. For example, the Local Government Pension scheme rules (which apply to many schools) haven’t been changed to accommodate the cap and won’t be this side of Christmas. That leaves employers (and the pension scheme providers) in a real dilemma because the regulations prohibit the relevant authority from making the payment, but they do not alter the employee’s entitlement to those payments. This is likely to lead to legal disputes.

The cap only applies where there is an extra cost to the public sector employer. Payments, or elements within payments, that result from an employee’s accrued right to a pension (including additional pension purchased with their own money) aren’t included in the cap.

Payments for death in service, payments for accidents or injuries and payments pursuant to a court order are also excluded. In addition, any part of a payment in lieu of notice which represents up to a quarter of an employee’s salary is exempt from the cap.

Employers don’t have to notify anyone before making a public sector exit payment. However, any employee who has received, or is due to receive, an exit payment, has to write to “all relevant authorities” that employ them, setting out details of the amount of their exit payment, how it is made up, the date they left their employment and who is responsible for payment. These rules mean that someone who has left one job but still has another in the public sector cannot receive more money than they are entitled to if they leave any other public sector job within 28 days of receiving the exit payment.

The guidance states that employers must keep a record of exit payments made to an employee or office holder and may keep records where they have exercised the cap.

Schools that breach these rules may be penalised. New guidance expressly states that “the relevant authority is responsible for ensuring any exit payment it makes does not exceed the public sector exit payment cap. Any payment that exceeds the cap and is not compliant with the regulations or directions is considered a payment beyond the organisation’s legal competence, which may result in sanctions on the organisation“.

All in all, these new regulations represent a substantial change to schools’ employment practices with potentially damaging consequences. To avoid legal complications, affected schools should get up to speed with them immediately. Further information is available in guidance and a new Treasury Direction.

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