August 22, 2017

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Employer Pension Contributions Count Towards the Calculation of a Week’s Pay

I have done my best to make this case report sound interesting and I like to think that even the most casual review of it will show that I have, well, failed. However, it is still important, especially for those involved in collective redundancy or TUPE consultations.

Employers may need to revisit the potential cost of unfair dismissal and failure to inform and consult claims following last month’s Employment Appeal Tribunal decision in University of Sunderland v Drossou. This held that the calculation of a “week’s pay” under s.221(2) Employment Rights Act 1996 should include employer pension contributions, and not just be the basic pay.

The calculation of a week’s pay is relevant to unfair dismissal claims like Drossou as the maximum compensatory award is the lower of a fixed statutory amount (£80,541 since 1 April 2017) and 52 weeks’ pay, where “a week’s pay” is calculated in line with s.221(2). In the Employment Tribunal’s view, when calculating the latter limit, the employer’s pension contributions should be included because:

  • S.221(2) does not state that the amount payable by the employer has to be payable to the employee (i.e. it could be payable to a third party such as a pension provider); and
  • if you take the word back to its Latin origins, “remuneration” as used in s.221(2) means a reward in return for services. Employer pension contributions are no less a reward for service than basic pay. [Left unaddressed here is the question of why that argument would not extend to the cash value of other benefits like insurances, discounts or equity schemes provided as part of the employment relationship].

The EAT agreed with the Tribunal’s reasoning and, clearly having a little time on its hands, also drew a largely gratuitous distinction between s.221(2) and s.27(1) ERA (the definition of “wages”). Section 27(1) specifies that the sums must be payable “to the worker” whereas those words are absent from section 221(2), that omission implying (one would hope) a reasoned decision by the draftsmen that that section should not be construed as requiring payment solely to the employee. [We can debate at some other point whether it is sensible that decisions of this potential financial significance are made on the basis of what statutory provisions don’t say rather than what they do – the ERA has 245 sections covering a wide variety of topics and it is tempting to conclude that some omissions relative to other sections on other points are just omissions and do not necessarily signify any conscious thought process of that type. Anyway, another day].

Yes but so what?

This decision will affect employers facing unfair dismissal claims where the claimant’s base salary is below the current statutory cap for unfair dismissal compensation of £80,541, i.e. where the calculation of a week’s pay becomes relevant. It will also increase the basic award where the employee earns less than the statutory cap of £489/week and all other awards based on the s221 definition such as the 8 weeks’ pay for a flexible working rules breach, etc.

However, both the compensatory and basic unfair dismissal awards are capped, so the additional cash for ex-employees with salary/pension entitlement totals below those caps may be limited. Of potentially greater significance is the impact of this decision on protective awards. Employers which fail to inform and consult under TUPE or in a redundancy process under the Trade Union and Labour Relations (Consolidation) Act 1992 will also be affected by this decision. Depending on the number of affected employees, the generosity of the pension provision and the size of protective award made up to the 13 week maximum, the increases generated by this decision in the amounts payable in either circumstance could be substantial. If you take a 10% employer pension contribution and go down for the full 13 weeks, for example, that is well over an extra week’s salary per head.

© Copyright 2017 Squire Patton Boggs (US) LLP

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About this Author

David Whincup, Employment Attorney, Squires Patton Boggs Law Firm
Partner

Following ten years at a Magic Circle firm, David has been Head of our London Employment practice since 1994. His expertise gained from twenty-five years as a specialist Employment Law practitioner covers a wide variety of employment-related issues, including in particular individual and team recruitment issues, policy and contract drafting, disciplinary and grievance procedures, individual and collective redundancies, the defence of employee discrimination and dismissal claims and other litigation, whistleblowing, employee health, data protection and matters surrounding...

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