For the first time the EAT has upheld a decision that an employer's pension contributions should be included in "a week's pay" when calculating the maximum compensatory award for unfair dismissal. This was the case despite the fact that employees do not receive their employer's pension contributions as income in their hand.

This decision means that in certain types of unfair dismissal claim the maximum compensatory award will be higher than traditionally thought (University of Sunderland v Drossou).

Background law

The compensatory award for unfair dismissal is designed to compensate the employee for financial loss caused by the dismissal, including loss of earnings and benefits and loss of pension rights. The Tribunal will award an amount which is just and equitable in the circumstances

However, the compensatory award is subject to a statutory cap in ordinary unfair dismissal cases. The statutory cap also applies in relation to most dismissals for automatically unfair reasons, save for dismissals that are automatically unfair for: (i) health and safety reasons; (ii) making a protected disclosure (i.e. whistleblowing); or (iii) selection for redundancy for either (i) or (ii).

The statutory cap is currently, the lower of £80,541 or 52 weeks' pay (gross). In this context, a "week's pay" is not subject to any limit (as is the case for the basic award for unfair dismissal). Where an employee receives non-variable pay for their working hours, then the amount of a "week's pay" for the purposes of the compensatory award is the "amount which is payable by the employer" under the contract of employment. In this case, the EAT had to consider whether a "week's pay" included the value of an employer's pension contributions into a pension fund, notwithstanding the fact that the employee does not receive this as income in their hand. If it did, then this would have the effect of raising the maximum potential compensatory award available to the employee. For example, an employee earns £1,000 per week gross and his employer contributes £150 per week into a pension scheme. If pension contributions are not included in a "week's pay" then the maximum compensatory award for that employee would be £52,000 (£1,000 x 52 weeks). However, if pension contributions are included, then the maximum compensatory award for that employee would be £59,800 (£1,150 x 52 weeks).

Facts

The Claimant was a lecturer at the University of Sunderland. She was dismissed on the grounds of an irretrievable breakdown in her working relationship with her manager. However, she went on to successfully claim that her dismissal was unfair.

In awarding compensation, the Tribunal took the view that a "week's pay" for the purposes of the compensatory award cap should include the employer's pension contributions. This was on the basis that the Employment Rights Act 1996 (ERA 1996) did not stipulate that a week's pay meant only sums payable to the employee. This departed from the approach taken by the Employment Tribunal in the earlier case of Port of London Authority v Payne. In that case, pension contributions were excluded from the calculation of a week's pay because they were not received directly by the employee but paid into the pension fund.

The University appealed.

Decision

Dismissing the appeal, the EAT Judge held that it was necessary to look at the statutory language used in the ERA 1996, rather than the conventional approach taken by previous Tribunals.

In an unlawful deductions from wages claim, section 27 stipulates that "wages" meant "sums payable to the worker", thereby ruling out employer contributions paid directly into a pension fund. By contrast, these words are absent from section 221(2) which governs the meaning of a "week's pay" for workers with non-variable remuneration. Here the test is simply: "the amount payable by the employer under the contract of employment".

In addition, section 221(2) refers to the employee's "remuneration for employment" and this meant a reward in return for the services provided by the employee. In the EAT's view, an employer's pension contributions were part and parcel of that reward.

Therefore, the Tribunal was correct to decide that sums paid by the employer into a pension scheme for the benefit of the employee should be counted in the calculation of a "week's pay".

Comment

This decision means that the maximum possible compensatory award for unfair dismissal may be higher where the employer contributes to a pension scheme. This will be the case in:

  • Ordinary unfair dismissals where the compensation does not exceed overall financial cap of £80,541. In these cases, the compensation will be limited by the 52 weeks' pay cap. Given that in the 2015–2016 period the median award for unfair dismissal was £7,332, this decision will be relevant to many ordinary unfair claims.
  • Automatically unfair dismissals which are subject to the statutory cap and where the compensation does not exceed the overall financial cap of £80,541

However, it should be remembered that this decision will not affect:

  • Ordinary and automatically unfair dismissals where the compensation exceeds the ultimate financial cap of £80,541. In these cases, the compensation will be limited by the overall financial cap, rather than the 52 weeks' pay cap.
  • Automatically unfair dismissals which are not subject to the statutory cap at all (see Background law above)

Outside the arena of unfair dismissal law, this decision will also increase the potential value of compensation in other types of claims which rely on the "week's pay" provisions in the ERA 1996, namely claims for a failure to inform and consult in respect of: (i) a TUPE transfer (under regulation 13 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006)); and (ii) a collective redundancy situation (under section 1888 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA 1992))

Employers facing relevant claims should provision for the increased potential value of the compensation which may be payable.