Recently issued government guidance on the use of special severance payments requires NHS organisations to ensure their internal policies/procedures and any applicable delegations are updated and that any such payments made are in line with the terms of the guidance.

Introduction

HM Treasury’s guidance on the use of special severance payments was issued at the end of May 2021 and details the government’s position on the use of special severance payments (sums paid to public sector staff at the end of their employment). The guidance supplements the special severance guidance set out in HMT’s Managing Public Money Guidance and it should be considered carefully and followed when it is proposed that a special severance payment will be made.

The guidance recognises that making special severance payments can be an important tool for employers but states that such arrangements must represent value for money and be fair to the tax-payer. Public sector employers therefore have a responsibility to ensure that special severance payments are made only where there is a clear justification for doing so, after all relevant policies/procedures have been followed and all alternatives fully explored and documented. HMT written approval for such payments must be obtained before they are offered.

What are special severance payments?

The guidance confirms that the following are likely to constitute special severance payments:

  • payments reached under a settlement agreement;
  • the value of employee benefits continuing beyond the exit date;
  • write-offs of outstanding loans;
  • special leave (including garden leave);
  • hardship payments;
  • payments for retraining related to termination of employment; and
  • payments agreed as part of a (judicial) mediation process.

Payments in lieu of notice and pension strain payments may constitute special severance payments depending upon the terms of the individual’s contract, relevant statutory provisions and any non-statutory applicable schemes.

The guidance confirms that the following do not constitute special severance payments:-

  • Statutory and contractual redundancy pay
  • Payments for untaken annual leave
  • Payments ordered by a court/tribunal.

Approval process

The guidance provides detailed information about the approval process that must be undertaken when employers are contemplating making a special severance payment. A new business case template must be completed and submitted to HMT, which requires information to be provided about the circumstances of the case, the financial and non-financial considerations and repercussive risk.

Ministerial approval will be sought for any special severance payment in excess of £100,000 and/or where the employee earns over £150,000.

The guidance states that employers should allow a minimum period of 20 working days for a case to be assessed.

Particular considerations for settlement agreements

The guidance sets out specific information about special severance payments made under settlement agreements. Given that the majority of employers would want to use a settlement agreement in circumstances where a special severance payment is being made to a departing employee, this section of the guidance will be of particular interest. The key points to note are:

  • A payment proposed under a settlement agreement which is in excess of contractual, statutory or other entitlements is a special severance payment for which prior HMT approval is needed.
  • Proposals for special severance settlements should consider:
    • evidence of attempts to resolve grievances before they escalate
    • precedents from other parts of the public sector may be unreliable
    • legal advice on value for money may not be conclusive by failing to take account of the wider public interest
    • costs savings (in frivolous/vexatious cases) may not mean the case should be settled, to discourage similar claims and because where claims are genuine it will ensure that prompt action is taken to prevent further grievances arising
  • The government’s default approach is not to settle and special severance payments will therefore be exceptional and must represent value for money for the government as a whole.
  • Special severance payments in settlement agreements will only be considered if attempts to settle without such payments have been made and:
    • legal advice clearly recommends settlement; or
    • if the legal advice is finely balanced there is a clearly evidenced value for money case and settlement is the best course of action.

Reporting/transparency

Employers will be required to publish information about any special severance payments in their annual accounts.

Evidence to support exits/special severance payments should be retained and easily accessible.

Breaching the guidance

Accounting officers in organisations are responsible for ensuring that relevant polices are updated to align to the guidance and that any special severance payments represent value for money and the necessary approvals have been obtained.

Any non-compliance could result in a deduction from the departmental budget or an increase in spending controls. There could also be financial sanctions, specifically the greater of five times the value of the special severance payment or £10,000. The guidance states that the severity of sanctions will increase incrementally if there are continuous breaches.

Conclusion

Employers would be wise to take the guidance into account early when dealing with disputes/negotiated exits, so as to determine its applicability and ensure the appropriate steps are taken and information collated and retained to support decision making and allow for a comprehensive/compelling business case to be submitted where necessary.