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A week’s pay includes Employer Pension Contributions

Posted on 13th September 2017
Case law

The Employment Appeal Tribunal (EAT) has ruled that a ‘week’s pay’ under the Employment Rights Act 1996 (ERA) should be calculated to include employer pension contributions.

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University of Sunderland v Drossou [EAT] 2017

The Facts

This case was a claim for unfair dismissal by Ms D against the University.  She was successful in her claim and entitled to compensation.  Rarely the facts are irrelevant as the question before the EAT was what was the cap for the compensation award? 

The cap on the compensation award for unfair dismissal is the lower of 52 weeks’ pay or the amount which is fixed annually (currently £80,541).  Ms D’s salary was below the fixed sum so what should be included in a week’s pay made a difference to the amount of compensation she could be awarded. 

A week’s pay for these purposes is calculated in accordance with provisions in the ERA which Ms D argued should include employer pension contributions.  The employment tribunal agreed and the University appealed.

The Decision

In a departure from a long understood position, the EAT agreed with the employment tribunal that ‘remuneration for employment’ for the purposes of calculating a week’s pay under the ERA included employer pension contributions.  The EAT considered that employer pension contributions were no less a reward than basic pay and could form part of ‘remuneration for employment’. The employment tribunal and EAT went on to conclude that there was nothing in the ERA limiting remuneration to sums actually paid to the employee which would exclude employer pension contributions paid directly to the pension fund.

In Practice

The definition of a week’s pay under the ERA is used for a number purposes, including the calculation of:

  • Statutory Redundancy payments
  • Guarantee payments
  • Notice pay for periods of statutory minimum notice
  • Basic and Additional Awards for unfair dismissal
  • Awards under the Transfer of Undertakings (Protection of Employment) Regulations 2006 and under the collective consultation obligations in the Trade Union and Labour Relations (Consolidation) Act 1992
  • Holiday pay
  • Payments for time off to look for work in a redundancy situation, time off for antenatal care and time off to attend adoption appointments.

This case means that employer pension contributions should, in most cases, be taken into account in calculating all of the above and increases the potential awards in employment tribunals for successful claims. 

So far as current employees are concerned, how employers calculate pay for holiday, certain types of time off and redundancy pay will need to be reconsidered. 

Pay for holiday (and certain types of time off), on the face of it, should be calculated on the basis of basic salary and a pro rata equivalent of the employer pension contribution.  This is so even if the employer pension contribution for the period has been paid into the pension.  It arguably leads to a double benefit of the pension contribution for the employee (or worker).  It is unclear whether the fact that the employer pension contribution has been made and was unaffected by the holiday or time off means the calculation of pay should not be affected.  The case does not address this at all and is likely an unforeseen consequence that may, in due course, be the subject of a decision on this point. 

The case may well be appealed (although any appeal is unlikely to be successful) and employers may wish to take action now or wait to see if the case is in fact appealed and the outcome of any decision.

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