Will the rules keep costs down but drive talent to the private sector?
The government recently closed a consultation on new draft regulations to cap public sector exit payments. These are the sums employees leaving the public sector are paid as part of termination arrangements and the new rules put mechanisms in place for exit payments to be repaid if the leaver returns to public sector employment within a relatively short period.
The provisions, set to come into force on 1 April 2016, are largely intended to address the public perception that taxpayers’ money is wasted when so-called ‘fat-cats’ receive large pay-outs. They follow a number of high profile cases in the NHS and local government concerning employees who received large payments only to return to the public sector almost immediately leading to criticism of ‘revolving doors’.
There is to be a statutory cap of £95,000 on exit payments that qualify under the new rules. These include payments for voluntary or compulsory redundancy, pay in lieu of notice, payments to reduce reductions to pensions because of early retirement, and ‘special severance’ payments such as those that form part of a settlement agreement. The draft regulations state that repayment will be required if the employee is re-employed, or engaged as a contractor, in the public sector or is appointed to a public sector office within one year of leaving.
The rules broaden the government’s original proposals. Formerly exit payments were to be recoverable if the individual returned to the same part of the public sector – now it’s any part. Also, the previous starting point was that recovery would apply only to those earning £100,000 or more. Now the minimum salary threshold is to be set at £80,000. ‘Taper’ provisions will apply for those who earn between £80,000 and £100,000 (the more you earn, the greater percentage of the exit payment would be repayable).
Given the size and diversity of the public sector, it is not uncommon for employees made redundant by one employer to find employment elsewhere in the same or a different part of the public sector. However, it is questionable whether this proposed legislation is a case of using a sledgehammer to crack a nut as cases in which employees receive large ‘windfalls’ and return almost immediately to the public sector are the exception rather than the norm.
Regrettably, the draft regulations are unnecessarily complicated and are likely to put off those affected by them. Anyone seeking to calculate or challenge a repayment would need to refer to at least six other pieces of legislation to determine the scope and meaning of the rules. They are likely to make redundancy and restructuring exercises more protracted and complex and may well prompt ‘satellite litigation’. However, the repayment provisions will at least provide some consistency across the public sector. Many settlement agreements already contain clawback provisions, although these tend to vary widely in their terms and scope.
The dynamic of restructuring exercises will undoubtedly change when the measures are implemented. This could result in fewer employees at the top end of the pay scale volunteering to leave, resulting in a greater proportion of compulsory terminations at that level.
The new rules will achieve costs savings, but there is speculation they may disproportionately affect specific areas of the public sector where skills are less transferable. For example, trade union Unison has highlighted that the majority of NHS staff train for specific roles and “develop skill sets that are just not required outside of the healthcare sector”.
Many commentators feel the repayment provisions will drive talented employees out of the public sector or keep them out of it for an extended period. A diversion of talent to the private sector and a loss of skills and investment may be an unfortunate unintended consequence of this legislation.
Paul McFarlane is a partner in the employment, pensions and immigration team at Weightmans LLP. He chaired the Employment Lawyers Association committee which responded to the draft repayment regulations consultation.
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