Making special severance payments

The Government has issued statutory guidance on the making and disclosure of Special Severance Payments by local authorities in England. Rena Magdani, David Potter and Paul Bownes examine what it says.

In March 2021 the Government revoked the Restrictions on Public Sector Exit Payments Regulations which had previously capped exit payments to public sector employees to a limit of £95,000.

In May 2021 the HM Treasury issued Guidance on Public Sector Exit Payments “Use of Special Severance Payments” which set out the Government’s position on Special Severance Payments which it said cost the Government millions of pounds each year. This guidance clarified that Special Severance Payments were any payments made on termination of employment that did not correspond to as established contractual, statutory or other right, that such payments should be exceptional and subject to a control process requiring written approval from HM Treasury before any offers to make such a payment were made. Ministerial approval was required for any exit package which included a Special Severance Payment of  £100,000 or more or where the employee earned over £150,000.

On 12 May 2022 the Department for Levelling Up, Housing and Communities published statutory guidance on the making and disclosure of Special Severance Payments by local authorities in England.

The new guidance is said to form part of the best value regime for local authorities in England.

In summary the new guidance:

• Defines Special Severance Payments as additional, discretionary sums paid on top of statutory and contractual redundancy or severance terms.
• Gives examples of payments that are likely to be Special Severance Payments which includes payments reached under a settlement agreement to discontinue legal proceedings without admission of fault.
• Gives examples of payments which may constitute Special Severance Payments including pension strain payments arising from employer discretions to enhance standard pension benefits and PILON payments.
• Identifies payments which will not constitute Special Severance Payments including statutory redundancy payments and contractual redundancy payments whether applicable to compulsory or voluntary redundancy and whether agreed by collective agreement or otherwise, a pension strain cost where a member’s retirement benefits become immediately payable without reduction, payments made as part of an ACAS early conciliation procedure and payments ordered by a court or tribunal or agreed as part of a judicial or non-judicial mediation.
• Requires local authorities to comply with the Best Value duty and to be able to demonstrate the economic rationale behind a proposed Special Severance Payment and to seek legal advice on the prospects of successfully defending an Employment Tribunal claim in deciding whether the proposed payment is good value.
• Indicates there may be exceptional circumstances where the existing statutory or contractual entitlements are insufficient to facilitate an exit, including when settling disputes but again only after receiving appropriate professional advice enabling a conclusion that a Special Severance Payment is a good use of public money and also where there is appropriate evidence that alternative routes of settling disputes have been considered and/or exhausted.
• Notes that even in cases where a commercial settlement is possible which would save the authority money compared to the cost of defending and defeating an apparently frivolous claim it might still be the case that continuing to defend the case at the extra cost would be appropriate in order to discourage other such vexatious claims.
• Provides an expected approval process for Special Severance Payments where any payment of £100,000 or more must be approved by full council, payments of £20,000 and above but below £100,000 to be personally approved and signed off by the Head of Paid Service with a clear record of the Leader’s approval and payments below £20,000 to be approved according to the authority’s scheme of delegation (noting that it is expected that local authorities should publish their policy and process for approving these payments).
• Reminds local authorities of various existing obligations to report pay data and exit payments and adds a requirement to disclose in annual accounts all severance payments and pension strain costs made in connection with termination of employment or loss of office.
• Sets out that an authority’s s151 Officer and Monitoring Officer should be able to justify any Special Severance Payments that are made and, in particular, any such payments that are not consistent with the statutory guidance.
• The new guidance applies to all local authorities in England and other bodies including fire and rescue authorities.

Authorities should therefore ensure that they have an approval process in place that enables it to consider the relevant criteria highlighted by the guidance, to ensure that any payment is approved at the correct level and to ensure that appropriate records are created and kept in order that it can demonstrate compliance with the expectations and best value duties placed upon it.

Rena Magdani and David Potter are Partners and Paul Bownes is a Managing Associate at Freeths.