Employer pension contributions count towards the calculation of a week’s pay, EAT confirms

Summary

The Employment Appeals Tribunal (EAT) has upheld a tribunal’s decision that the calculation of a week’s pay under the Employment Rights Act 1996 should include the value of employer pension contributions. This could increase the potential value of a week’s pay and, therefore, the size of awards made by tribunals.

This decision is a departure from long-standing practice. It affects employers facing unfair dismissal claims as well as claims for a protective award due to a failure to inform and consult.  Outside of the Tribunal arena, it will also affect calculations of statutory redundancy pay for lower-paid earners (i.e. those earning below the statutory weekly pay cap – currently £489) because the same legislation applies.

Findings

The Employment Rights Act 1996 (‘ERA’) stipulates the method of calculating a week’s pay for employees with regular working hours:

“the amount of a week’s pay is the amount which is payable by the employer under the contract of employment” (section 221(2)).

When calculating a week’s pay the established practice has been to exclude employer pension contributions on the basis that they are not paid directly to the employee but rather are paid to a pension fund.  The rules around calculating a week’s pay for employees who don’t have regular working hours are more complex but are at least consistent when it comes to the treatment of pension contributions.

In University of Sunderland v Drossou the employment tribunal awarded compensation for unfair dismissal. The tribunal included the employer’s pension contribution as part of the claimant’s weekly pay for reasons including:

  • Section 221(2) of ERA does not state that the amount payable by the employer has to be paid to the employee (i.e. it could be payable to a third party)
  • The tribunal relied on the Latin origins of the word “remuneration” meaning a reward for services, holding that pension contributions are no less a reward for service than basic pay.

The decision was appealed by the University. The EAT dismissed the appeal and agreed with the tribunal’s interpretation of a week’s pay. It accepted the reasoning the tribunal gave and in so doing drew a distinction between s.221(2) and s.27(1) ERA (which relates to unlawful deduction of wages matters). The latter expressly states that sums must be payable to the worker, but these words are absent from s.221.

Comment

The decision will increase the amount of the basic award and statutory redundancy pay where an individual earns below the cap of £489 a week (circa £25,500 per year).  It will increase unfair dismissal compensatory awards for a much broader group i.e. all those earning less than the current statutory maximum of £80,541 (the level of this cap does not change as a result of this decision).

Employers who fail to inform and consult under TUPE or during a redundancy process can be ordered to pay a protective award of up to 13 weeks’ pay to each affected individual, and the same interpretation as in Drossou will apply although this time without the benefit of any form of pay cap.

Where an employee participates in a defined benefit contribution pension scheme, the impact could be very significant as employer contribution rates can be in the high 20% in some LGPS schemes.

This increased financial exposure on unfair dismissal claims may well influence the cost-benefit analysis of litigating versus settling, and it will make it even more important that collective and TUPE consultation processes are well-managed to ensure there is no breach of the rules.  We would also recommend that organisations review the wording of any enhanced redundancy policies to check whether the Drossou decision could have an impact – those employers with policies which are phrased in terms of ‘We calculate enhanced redundancy pay on the same basis as for statutory redundancy pay but disapplying the weekly cap’ could find this case used against them for the calculation of enhanced redundancy pay as well.

For further information about any of the matters raised in this Blog – including looking at your enhanced redundancy terms and how to ensure proper collective consultation – please contact your usual contact in the Devonshires Employment and Pensions Team or to read more about other cases this summer that have potentially increased employers’ exposure on claims then please click here.

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