Recovery of public sector exit payments

The government is intending to implement new measures to allow public sector exit payments to be recouped where the individual has been re-employed in the public sector within a year. This is to address what it perceives to be the problem of individuals benefiting from generous public sector severance arrangements quickly then finding new employment elsewhere in the public sector, so that the severance payment becomes a 'windfall' and can represent "poor value for money". Preparation for this change needs to start now, says Employment Partner, Jodie Sinclair.

Key features of the scheme

Although there is already some regulation of high-value exit payments for senior managers in the NHS and in local government, the new arrangements set out in the draft Repayment of Public Sector Exit Payments Regulations 2015  ('the Regulations') go further and cover a wide range of payments, including the following. 

• Redundancy payments.
• Payments on voluntary departure.
• Any payment to reduce or eliminate an actuarial reduction to a pension on early retirement.
• Payments in respect of outstanding contractual entitlements, such as payments in lieu of accrued but untaken annual leave.
• Compensation payable under a contractual term.
• Payment in lieu of notice.
• Payment in the form of shares or share options.

It is envisaged that the Regulations will apply to payments made under Settlement Agreements

Repayment is made to the organisation from which the employee has exited, and both office-holders and employees will be covered.

The Regulations bite where the exit payee returns to employment in the same 'sub-sector' of the public sector. These sub-sectors are wide and include health, education and the civil service.

Exemptions and limitations

The Regulations do not apply across the whole of the public sector workforce; they will only affect individuals who have earned £100,000 or more in the 12 months prior to the termination of their employment.

The amount of the severance payment to be repaid will be reduced pro rata, depending on when the individual returns to public sector employment.  There is also provision for lower repayments if there is a drop in remuneration on re-employment, either because the new role is less well paid or is part-time.

The Regulations contain a carve-out for payments which equate to normal contractual entitlements, such as payments in lieu of untaken holiday, notice pay or bonus payments.

There is also a waiver available, so that there cannot be any clawback of money paid in compensation of 'employer fault'. In other words, the clawback provisions are not intended to deter settlement arrangements where there would otherwise be a risk of successful litigation against the employer.

Furthermore, no repayment of severance monies will be required if an individual is re-employed, engaged as a contractor or appointed to office in the public sector more than 12 months' after their exit. 

Running the scheme

The mechanics of putting the repayment provisions into effect are set out in Part 5 of the Regulations and all parties will be subject to various requirements.

The outgoing employer will be responsible for

• informing the exit payee of the potential consequences should the exit payee return to work in the same sub-sector
• keeping records of the exit payment made for as long as may be necessary (and in any event, for at least 12 months); and
• seeking repayment where appropriate.

The employee will be responsible for

• informing the old and new employer about any exit payment that could possibly be repayable
• before taking up new employment or office, making arrangements with the old employer to repay any exit payment or proportion thereof that may need to be repaid; and
• repaying the old employer any amounts due within a reasonable time.

The incoming employer will responsible for

• ensuring that any amount due to be repaid has been repaid to the old employer before allowing the exit payee to begin new employment; and
• ensuring that, should the exit payee fail to comply with their duty to repay, there are appropriate provisions in place to remove the exit payee from their new role or to stop them working.

Timings and next steps

The Regulations are timetabled to come into force no later than 1 April 2016.

The long lead-in time is intended to allow public sector employers time to amend any compensation schemes so that they comply with the Regulations. The government has stated that the Regulations are intended to be a starting point for public sector organisations, and they will not preclude organisations from going further than the statutory framework.

The Regulations are currently in draft and have not yet been 'laid' before Parliament, so it is possible that further changes may be made once they come into force.  However, the framework for the Regulations is derived from sections 154-156 of the Small Business Enterprise and Employment Act 2015, so the key elements of the scheme (i.e. repayment required if the employee or office holder is re-employed or re-engaged to a public sector office within one year of their exit) will not change.  

You will, therefore, need to make use of the lead-in time before next April to ensure that you have reviewed any policies, procedures, contractual documentation and / or compensation schemes, which may be affected by this change, and put in place the necessary amendments or new documentation. 

Please do contact me, or your usual Bevan Brittan contact, if you require any further information or assistance with the process of preparing for the implementation of the Regulations.