When dealing with the cap on compensation awards for unfair dismissal, the question is often asked as to whether the cap really is the cap. The reason for this is that an employee’s loss is based on their actual loss i.e. their income after tax. So, if the statutory cap represents the net loss of the Claimant, can the amount be grossed up above the cap to allow tax to be deducted without affecting the Claimant’s loss? To date there have been conflicting decisions in the tribunals on this.
In the recent case of Hardie Grant London Ltd v Aspden, however, this issue was effectively dealt with. Here the EAT was asked to determine at what stage employment tribunals should be ‘grossing-up’ compensatory awards to allow for taxation when the statutory cap is applied.
‘Grossing-up’ occurs before the cap is applied, held the EAT. This means that the cap really is the cap.
In this case, the Claimant had won her claim for constructive dismissal. As tax was due on her compensatory award over £30,000, the tribunal ‘grossed-up’ the amount awarded to allow for tax, after it had applied the statutory cap (which at the time was £65,300). The tribunal therefore awarded the Claimant £87,166.67 on the basis that the amount the Claimant would receive after tax would be at the cap.
On appeal, the EAT held that this was the wrong approach. Whilst the compensatory award was based on loss of net earnings, and ‘grossing-up’ ensured that Claimants received net loss earnings from the taxable element of the award, the tribunal should have ‘grossed-up’ before applying the cap. Subsequently, the EAT reduced the compensatory award to the (then) cap of £65,300.