Case update (2): Tribunal awards – calculating a week’s pay

Summary:  Should a week’s pay include employer pension contributions, rather than just basic pay, for calculation of compensation for claims under the Employment Rights Act 1996 (including unfair dismissal and failure to inform and consult)?

Yes, says the EAT in University of Sunderland v Drossou, available here.

Facts:  Ms Drossou worked for the University of Sunderland and was dismissed as a result of an irretrievable breakdown in working relationships for which she was considered to be the primary cause. Ms Drossou brought a claim of unfair dismissal which the Tribunal upheld.

The Tribunal ordered compensation and calculated a week’s pay as including the employer pension contributions. This was contrary to the longstanding practice to exclude such employer pension contributions from the calculation of a week’s pay on the basis that the payments are not paid to the employee but into the pension fund.

The Tribunal explained its deviation from standard practice on the basis that:

  • The law under the Employment Rights Act 1996 (‘the ERA’) 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 the ERA means a reward in return for services. Employer pension contributions are no less a reward for service than basic pay.

The University appealed this finding to the EAT, which agreed with the Tribunal’s decision.

Implications:  Given the potential cost of this decision to employers, hopefully this decision will be appealed…

However, in the meantime, employers (and their advisors) should increase their calculations of the potential value of claims accordingly.

In particular, 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 (currently £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 on a week’s pay (currently £489) and all other awards based on the ERA definition such as the 8 weeks’ pay for a flexible working rules breach, etc.

Of perhaps greater importance 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 could face large increases in the total compensation payable. The final amount will depend 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. However, for example, if each employee has a 10% employer pension contribution and they all get an award of 13 weeks that is a substantial increase in the total payable.