Recovery of public sector exit payments

The Government consultation paper, Recovery of Public Sector Exit Payments, published 25 June 2014 by HM Treasury presents a series of proposals intended to allow recoupment of exit payments from high earners returning to the same part of the public sector.

The new proposals are intended to affect individuals earning above £100,000 per annum with a taper down to around £80,000, repaying the full amount should they return before 28 days and a pro-rata amount if they return to the same part of the public sector within 12 months. The intention is to include legislative provisions in the Small Business Enterprise and Employment Bill. 

The cost of public sector exit packages, including compulsory exits such as redundancy, was £2bn in 2012-2013. There have been a number of recent high profile cases of individuals who received large payments, then quickly returned to public sector roles. This includes in local government where, of 37 chief executives who left by mutual agreement over a two-year period from January 2007, six had been employed in another council within 12 months. 

In parts of the public sector some form of formal recovery arrangements are already in place. However, these are not universal. In local government, where pay and reward policies are determined at a more local level recovery provisions are less common. 

Whilst the policy background and intention are entirely logical, consideration of the range of payments to be covered gives rise to a number of legal consequences and may also have unintended practical and legal effects.

Types of exit payments subject to recovery provisions

These are intended to be wide-ranging and include compensation payments due as a contractual entitlement, redundancy payments, payments in lieu of notice, discretionary payments in pensions to allow for early retirement and settlement agreements

The Government intends to create a power to enable retrospective variation of existing contractual terms where they conflict with the proposed policy. This retrospective power to vary contracts of employment will create great uncertainty as to the rights as set out in the contract of employment between employer and employee at the time this is entered into.  

The current proposals could also constitute an attempt to circumvent current terms and conditions safeguarded by TUPE under the Acquired Rights Directive.

Voluntary and compulsory redundancy packages in local government are likely to have been collectively negotiated and to be incorporated into contracts of employment or at least be part of a collective or workforce agreement.

As well as raising issues as to the legal mechanism for such a variation of contractual terms and the effect on collective agreements, the uncertainty as to what could be clawed back may make reaching agreement in collective negotiations difficult and lead employee representatives to seek more favourable packages.

It is also unclear whether re-employment within 28 days will permit continuity of service to be retained in the circumstances envisaged under the current proposals. 

The inclusion of payments to buy out actuarial deductions in pensions creates a multitude of issues. It is difficult to see how this would be capable of repayment, if the effect of that payment into the fund is the enhanced benefit of a pension which continues to be paid out. This would seem to discourage an individual from re-entering the labour market.

The provisions are also intended to apply to settlement agreements. To re-open such agreements is likely to be difficult as their terms are normally confidential. Consequently, individuals may be less inclined to enter into settlement agreements, with their advisors suggesting they might be better off bringing claims in the Employment Tribunal to recover awards that would not be subject to recoupment.

As the proposals cover both statutory and contractual rights there are issues with the rights of payment of annual leave on departure under the Working Time Directive 2003. It is questionable, if the recruitment provisions are applied to these entitlements, whether this will comply with EU law. 

Exemptions

The proposals state specifically that payments made in respect of injury, ill health or death in employment are exempt but do not clarify how the statutory process will define such payments. 

It is not intended that the provisions would apply to public service pension schemes where there is an established, unqualified right to a full employer-funded unreduced pension in the case of redundancy set out in the scheme, regulation or rules. 

The provisions are also not intended to apply to appointments made on a casual basis for less than 15 days in any period of 91 consecutive days. The definition of what is meant by “casual” needs clarification.

The Government is proposing an exceptions process. The suggestion is that there will be exemptions to particular exit payments used to settle statutory claims or disputes or claims under an individual employment contract. This could address the difficulties relating to interference with contractual rights and settlement agreements, but the lack of certainty and predictability is undesirable. Employers and employees need to know what they are agreeing to and what the cost to each will be in future. 

Recovery provisions

The recovery provisions contained in the consultation paper are unclear. There is a stated intention not to recover beyond the statutory minimum under the Employment Rights Act 1996 outside the 28-day period, which would be likely to represent a relatively small proportion of a senior exit packages in local government. Confusingly, the example in the consultation paper appears inconsistent with this as it indicates a much higher level of recovery.

If a former employee obtains re-employment within 28 days it does not seem equitable or consistent with general employment practices, and the treatment of termination payments in the private sector, to require recovery of any payment made to the employee for reasons other than to cushion the blow from unemployment. For example, payments may be made as part of a settlement agreement to waive discrimination claims. If that sum has to be repaid would the waiver still stand?

Whilst re-employment is capable of remedying the continued loss of income it is not capable of remedying the loss of continuity of employment or the waiving of employment rights. If the intention is expressly to exclude certain payments this must be made clear. 

Compliance and enforcement

The proposals are intended to apply when the individual returns to the same part (or subsector) of the public sector with the definition of “subsector” to be determined as part of the consultation.

Clarity over what is meant by the “same part” or “subsector” will be key in determining the extent of the legal impact. The repayment requirement may inadvertently act as a type of restrictive covenant on an employee and a barrier to re-engagement and talent retention within local government. Should these proposals be enacted in relation to settlement agreements suitable provision would need to be included in local government settlement agreements to facilitate recovery. 

Given the complexity of the provisions it may be difficult for local government employers to identify when the provisions apply. They may not have the appetite and resources to put in place the administrative and policy steps for recoupment.

Conclusion

Overall, the proposals raise significant potential legal concerns regarding the effect of statutory variation of existing contractual terms, the effect on collective agreements, how they will be implemented in relation to pension provisions and potentially, settlement agreements. The proposals lack clarity in several crucial areas. This legislation may be enacted effectively to achieve the policy aim but considerable clarification and guidance will be needed for this to be achieved.

Maeve Vickery is Head of Commercial and Employment at Pardoes Solicitors LLP and chaired the Employment Lawyers Association Working Party responding to the Government consultation. Maeve can be contacted on 01823 446210 or This email address is being protected from spambots. You need JavaScript enabled to view it..