The Treasury has issued new guidance which relates to 'Special Severance Payments' (SSPs) made by public sector employers to their employees.
According to the Treasury, the SSP system costs the Government millions of pounds, and so it is vital that they are made only when there is a "clear justification for doing so" to make sure that the taxpayer is fairly funding them. A Government decision was made in March 2021 to revoke the Restriction of Public Sector Exit Payments Regulations 2020, which introduced a £95,000 cap on severance payments in the public sector.
What Is a 'Special Severance Payment'?
SSPs are those payments made to employees, officeholders, workers, contractors and others on an exit, outside of normal statutory or contractual requirements. The Treasury's new guidance outlines the criteria that employers should consider before making an SSP.
The guidance states that: "Any payment in respect of which the right is disputed by the employer, in whole or in part, should be treated as a Special Severance Payment which requires approval”. It is the responsibility of the public sector employer to ensure that the SSP arrangements are "fair, proportionate and lawful." The Treasury's guidance outlines the criteria that employers should consider before making an SSP.
The guidance outlines a number of examples of what might constitute an SSP as follows:
Any honorarium payments or gifts
Payments to employees for retraining related to their termination of employment
Compensation in lieu of notice
Payments agreed as part of a judicial or non-judicial mediation
Payments which do not constitute an SSP:
Statutory redundancy payments
Contractual redundancy payments whether due to voluntary or compulsory redundancy and whether agreed by collective agreement or otherwise
Payment for untaken annual leave
Payments (e.g. for compensation) ordered by a court or Tribunal
The guidance makes it clear that HM Treasury must approve SSPs emphasising that it is the responsibility of the individual employer to ensure that the payments are “fair, proportionate and lawful”. The guidance also highlights that payments can appear to reward failure and set a poor example of the public sector and should not be seen as a soft option to avoid management action, disciplinary processes, unwelcome publicity or reputational damage.
For public bodies, this should include a published breakdown of the number of SSPs made in the previous financial year, the total value of the payments paid out and also the maximum, minimum and median value of all of the payments made. These should also be reported in their annual accounts. Records of cases submitted for approval and the subsequent decisions should be retained.
Penalties for non-compliance
The new guidance establishes that non-compliance may result in a fine of either five times the amount of the Special Severance Payment, or £10,000, whichever is higher - at the discretion of the Chief Secretary of the Treasury. Examples of non-compliance are provided and include agreeing SSPs without the approval of HM Treasury, making a payment in excess of the approved amount and non-compliance with any part of the new guidance. Sponsoring departments must inform HM Treasury within 20 working days of any potential breaches although mitigating circumstances such as the value of the payment and previous compliance may be considered.
It is clear that the new guidance looks to urge alternatives to settlement and is very much in keeping with public bodies to be learning organisations and defending claims that lack merit. The new guidance states that SSPs will only be considered if attempts to settle a dispute without such payments have been made or if legal advice supports settling the case. Organisations should expect some scrutiny on whether they have explored alternative means of resolution rather than making an SSP settlement.
If you would like to discuss these changes, please do not hesitate to contact Stuart Law, Payroll Director, or your usual AAB contact.
To find out more about our Payroll & Employment taxes service, click here.