University of Sunderland v Drossou UKEAT/0341/16/RN

Why care?

The Employment Appeals Tribunal (EAT) has held that, in calculating the compensatory award payable to the Claimant on her unfair dismissal, “a week’s pay” included employer pension contributions. Until now, it has been tribunals’ usual practice to exclude employer pension contributions from the calculation of a week’s pay, on the basis that they are not received directly by the employee but paid into the pension fund. The change will have implications for other areas, including calculating redundancy pay and gender pay reporting

The facts

The Claimant, a university lecturer, was employed by the University of Sunderland for ten years. The working relationship between the Claimant and her line manager broke down and both brought a grievance complaint against the other. The Claimant was suspended from duty and then dismissed, due to an irretrievable breakdown in the working relationship between her and the line manager. The Employment Tribunal held that the Claimant had been unfairly dismissed and it made an order for reinstatement. After this failed, the Tribunal awarded the Claimant a basic award of £6,032, a compensatory award of £54,069 and an additional award (since the order for reinstatement had failed) of 52 weeks’ pay amounting to £24,128.

In calculating the compensation due, the Employment Tribunal considered the meaning of “a weeks’ pay” under the Employment Rights Act 1996 (ERA 1996).. The Employment Tribunal decided that this would include employer pension contributions, on the basis that the relevant definition at section 221(2) of ERA 1996 covers sums “payable by the employer under the contract of employment“, and does not specify that these sums must be paid directly to the employee.

On appeal, the EAT confirmed that, in calculating the compensatory award payable, employer pension contributions would count towards a week’s pay. The EAT contrasted the definition at section 221(2) of ERA 1996 with the definition of “wages” as set out in section 27 (for the purposes of unlawful deduction from wages). The Tribunal noted that “wages” are stated to be “any sums payable to the worker in connection with his employment “, showing that in the drafting of the ERA, where a definition has been intended to limit the remuneration under consideration to that payable to the employee, this has been specified in the wording.

The EAT criticised the reasoning set out in a previous Employment Tribunal judgment, Payne v Port of London Authority, which represents the conventional approach that has been taken by employment tribunals until now.. In that judgment, the Employment Tribunal had considered the ordinary meaning of “a week’s pay” without analysing the wording of the legislation in question, and had come to the conclusion that it did not include employer pension contributions.

What to take away

Employees who earn less than the current maximum on a week’s pay (£489 per week at current rates) may find that their entitlement to awards which use that definition will increase – such as basic unfair dismissal awards and redundancy payments.

The compensatory award for unfair dismissal is capped at a maximum of 52 weeks’ pay or £80,541 (this year). The compensation due to successful unfair dismissal claimants may also go up, since employer pension contributions must be included in a week’s pay. The position of employers operating defined benefit pension schemes was not considered – in these circumstances, employer pension contributions can be a very significant element of payroll costs.

There are also likely to be broader implications; the definition of a week’s pay is widely used in ERA 1996, such as in the context of holiday pay and statutory notice periods. There is no cap on a week’s pay when calculating protective awards for failure to inform and consult employees under TUPE, or in collective redundancies, so these will increase. It will be necessary to consider the context of each use, in order to assess whether or not pension contributions should be included in the definition of a week’s pay for those purposes.

A week’s pay and gender pay reporting

The general consensus has been that employer pension contributions are intended to be excluded from the definition of ordinary pay for the purpose of gender pay gap reporting. This is on the basis that payments made by employers directly into a pension scheme are not usually regarded as being paid to the employee. The Acas guidance for employers on such reporting states that, “Employer pension contributions go directly to a pension fund, so these have nothing to do with the gender pay gap calculations.” The Acas guidance has not yet been updated as a result of this decision, but it seems likely that it might be in future, and so this should be monitored.