Changes to public sector exit payments

The health sector will shortly have to get to grips with complex new rules on making and recovering exit payments. Jog Hundle from Mills and Reeve explains.
Claw-back or cap?
There are two separate provisions being developed by the Government. The outline legislation is already in place to claw back exit payments from higher earners if they return to work anywhere in the public sector within a year. The regulations spelling out the full detail are now in final form, and are likely to take effect in April. Repayment will be on a sliding scale, depending on the length of time between jobs and with adjustments if the new job is for fewer hours.
On top of that there will be an overall cap of £95,000 on all public sector exit payments, regardless of how much the recipient is earning. The legislation providing for the cap is still going through Parliament, and full regulations are still to be published. It would make sense for this new cap to come into effect in April too, but it is not yet known whether that will be possible.
Who will be affected?
The new rules will apply to ‘prescribed public sector authorities’. These will be set out in a detailed list attached to the regulations, and include all NHS trusts and foundation trusts and most other NHS bodies.
Only higher paid employees (those earning at least £80,000 pa) will be subject to the claw-back rules, but the cap applies to all employees. That means that long-serving staff on relatively low pay could see their contractual redundancy payments capped.
The new rules will apply in addition to the existing rules requiring the approval of Treasury to non-contractual exit payments in the NHS, the provisions of Agenda for Change (which require repayment of redundancy payments in the event of re-employment within four weeks) and the Direction to NHS Bodies in respect of claw-back clauses issued under Health Service Circular 2004/001.
What payments are caught?
The broad principle will be that all payments made in connection with the termination of employment should be caught, whether these are due under the contract or paid on an ex gratia basis. However, there are exceptions for contractual bonuses and payments for accrued holiday pay. Notice pay will be included in the calculation of the cap, but not subject to claw-back, save for the provisions under HSC 2004/001.
More controversially, the cost to the employer of providing an unreduced pension on early retirement will not only be included in the calculation of the cap, but will also be subject to claw-back. Amendments to the relevant pension scheme rules will be made to remove this entitlement if it would exceed the cap, though the employee will have the option of ‘buying back’ the lost benefit.
Practical issues
The main controversy surrounding the new rules is that they are not limited to the ex-gratia element of exit payments. In some cases they will operate to limit or remove existing contractual entitlements.
There are also practical concerns about how the claw-back will be enforced. The regulations impose an obligation on a new public sector employer to police the re-payment to the former employer, even to the extent of dismissing the new member of staff if satisfactory arrangements for repayment have not been made. The calculation of what is owed will often be complex and there will also be additional record keeping obligations. None of this is likely to be popular, either with staff or managers.
Looking further ahead, the Government has recently published a consultation paper about making further changes to the underlying terms and conditions regarding termination payments across the public sector. In time this may reduce the need for the blunt instrument of a financial cap, for example, by setting a maximum tariff when calculating redundancy payments and applying tapering provisions where the employee is nearing retirement age.
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