95K Cap Scrapped With Retrospective Effect - Wales

Out of the out of the blue on Friday 12 February 2021, the Government announced that it will be revoking the Public Sector Exit Payments Regulations 2020, which place a £95,000 cap on public sector exit payments. We understand that this news has not been communicated directly to employers, yet, so we therefore wanted to draw this to your attention.

The Regulations came into force – in the face of considerable criticism – in November 2020. Three months later, the Government has recognised serious deficiencies in the Regulations, which they describe as “unintended consequences”, and has issued a Treasury Direction , to suspend them, whilst the process of formal revocation can take place.

It is important to note that the Guidance Notes assert that Treasury Directions and hence this change, do not apply to exit payment made by devolved Welsh Authorities. The Welsh Government is currently clarifying its position, and an update is expected.

In the meantime, and in the expectation that the Welsh Government will not want to hold employers to Regulations which HM Treasury clearly regards now as unsound, you will need to reassess your position in terms of recent and any planned restructures and exit programmes as the cost and HR implications have shifted.

The accompanying Treasury Guidance Notes provide the following guidance to employees:

“2.1 If you have been directly affected by the cap whilst it was in force, you should request from your former employer the amount you would have received had the cap not been in place by contacting your employer directly. Employers are encouraged to pay to any former employees to whom the cap was applied the additional sums that would have been paid but for the cap.”

This is welcome news for any employees who have been adversely affected by the cap.

The Guidance notes also “encourage” employers to pay a former employee who had an exit between 4 November 2020 and 12 February 2021, and to whom the cap would have applied, the additional sums that would have been payable but for the cap.

However, the guidance does not address the equally serious issue of how the additional cost of lifting the cap, retrospectively, will be funded by employers who have organised and perhaps implemented restructures or exit programmes based on the understanding that its costs were capped, only to learn now that these costs could now be significantly inflated. The cost could be significant and could not come at a worse time for some employers. It is also unclear whether and to what extent employers are legally empowered to make the “ top up” payments before the current Regulations are formally revoked – the suggestion is that it is acceptable to make what would otherwise be an unlawful payment because employers are now encouraged to do so by Treasury Guidance

Perhaps this issue will be considered if the Judicial Review, that is listed for March 2021, goes ahead notwithstanding this development. That would seem sensible given there is every likelihood that Treasury will revisit its commitment to cap exit payments when it has considered and addressed the unintended consequences of its original programme for change.

Employers who are currently planning exit programmes will now need to take stock and re -evaluate the financial and HR implications of this U turn on recent planned exit programmes. You may also need to consider whether an urgent review of existing compensation policies is required, as these would now be fully applicable and, without the £95k, may be outdated, unjustifiable on discrimination grounds and/or unaffordable, particularly where they allow enhanced redundancy pay, as well as uncapped pension strain costs, in relation to the over 55s.