3 min read

Public sector exit payments Treasury guidance

Read more

By Zoe Wigan, Hilary Larter and Ceri Fuller


Published 10 June 2021


The Treasury has published guidance on the criteria which public sector employers should consider before proposing the use of a special severance payment. 

The facts

HM Treasury has published guidance on the criteria which public sector employers, including NHS Trusts, should consider before proposing the use of a special severance payment. It is a supplement to the existing guidance in Managing Public Money. These are payments to employees whose employment is terminated that do not correspond to any contractual or statutory right, including payments reached under a settlement agreement, payments agreed as part of a judicial or non-judicial mediation, the outstanding value of unclaimed employee benefits, write-offs of unpaid loans, payments for special leave such as gardening leave, hardship payments, compensation in lieu of notice, and pension strain payments. The guidance also applies to office-holders, workers and contractors.

The guidance outlines the steps to be taken before authorisation of a special severance payment and introduces new transparency requirements for annual reporting. For special severance payments which are above £100,000 and/or where the employee earns over £150,000 prior ministerial approval is required to be sought. The reason for this is that such exit payments are significant payments from public funds.

The purpose of the guidance is to set out the criteria employers should consider before making a special severance payment, the control process for relevant special severance payments and the transparency requirements for special severance payments. The guidance emphasizes that employers have a responsibility to ensure that special severance payments are only made exceptionally when there is a clear justification for doing so. Employers should also ensure that all relevant internal policies and procedures have been followed and all alternative actions have been fully explored and documented. When it is established that a special severance payment must be paid, it is the responsibility of both individual employers and sponsoring departments to ensure their special severance payments arrangements are fair, proportionate and lawful.

Particular guidance is set out for settlement agreements which contain special severance payments and there is a requirement for prior written authorisation from HM Treasury before a settlement is agreed.

The guidance confirms the Government’s default approach is that public bodies should not settle claims (even if frivolous or vexatious) except in exceptional circumstances, where there is also value for money.

What does this mean for employers?

Employers must take note of this further guidance when considering any termination payment which is not contractual or comes from a statutory right. It is important that both prior internal and external approvals, including HM Treasury approval and potentially ministerial approval, for such payments are sought as otherwise the payment may be deemed ultra vires (unlawful). This guidance indicates approval should be obtained before any offer (verbal or in writing) of settlement is made to the employee. Consideration of settlement should therefore be made at the earliest possible opportunity to avoid any delays in obtaining the necessary approvals.

The guidance is clear that approval is needed for payments of compensation in lieu of notice. This guidance will not apply to payments paid due to redundancy, untaken annual leave or payments ordered by a court or employment tribunal.

If employers currently have internal guidance on this area it should be brought into line with this new guidance.

Public Sector Exit Payments Guidance on Special Severance Payments