Departing from long established practice, the Employment Appeal Tribunal has decided that the calculation of a week's pay should include employer pension contributions.
The calculation of a "week's pay" has important implications for how a number of employment tribunal awards are calculated. For example, where there is a failure to inform and consult in a collective redundancy situation, the award is up to 90 days' pay, or in a TUPE situation, the award is up to 13 weeks' pay. To calculate these awards there is no statutory cap on the week's pay, so it is important when determining the amount of compensation due, that a week's pay is calculated accurately.
This case of University of Sunderland v Drossou considered how to calculate a week's pay for the purposes of an unfair dismissal compensatory award and additional award for failure to reinstate the Claimant. The maximum unfair dismissal compensatory award is equal to 52 multiplied by "a week's pay" or £80,541, whichever is the lowest. This means that the method for calculating a week's pay will be critical for those claimants who earn less than £80,541 per annum.
In this case, the Employment Tribunal found that the Claimant, Ms Drossou had been unfairly dismissed, and that for the purposes of calculating the maximum compensatory award, a week's pay must include the value of her employer's pension contributions. The definition of a week's pay in employment legislation provides that where the employee's remuneration in normal working hours does not vary with the amount of work done in the relevant period (eg an hour or a week), the amount of a week's pay is "the amount which is payable by the employer under the contract of employment".
The Claimant's employer relied on previous case law in which employer pension contributions were not included in 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. However, the Employment Tribunal did not follow the approach taken in previous cases for two reasons. Firstly, the Employment Tribunal noted that the relevant legislative provisions do not state that the amount payable by the employer under the employment contract has to be payable to the employee. Secondly, it considered that the term 'remuneration' in the relevant legislative provisions means a reward in return for services, and pension contributions are no less a reward for services than basic pay.
The employer appealed against this finding to the Employment Appeals Tribunal (EAT). However, the EAT agreed with the Employment Tribunal that employer pension contributions should be included in the calculation of a week's pay for the same reasons.
What this decision means for employers
This approach departs from the long established practice of excluding employer pension contributions when calculating a week's pay. The Court's decision increases the maximum unfair dismissal compensation of all claimants who earn less than £80,541. However, the decision has far reaching effects as it also extends to other UK remedies such as compensation for failure to inform and consult on the transfer of a business or change in service provider, and the protective award for failure to inform or consult in large scale (collective) redundancy dismissals. In cases where these awards are made, the effect of this case could be to materially increase the amount of compensation that an employer has to pay. For employers who participate in defined benefit pension schemes, who often pay a very high employer contribution rate, the effect of this decision could be particularly pronounced.
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