In the case of The University of Sunderland v Drossou, the EAT has upheld the Employment Tribunal’s decision that employer’s pension contributions should count towards the calculation of a “week’s pay” under the Employment Rights Act 1996, contrary to long-standing practice.
Numerous Employment Tribunal awards and payments are calculated on the basis of a week’s pay, which is defined as “the amount which is payable by the employer under the contract of employment”. It has long been established for parties to exclude any employer pension contributions when calculating what a week’s pay is, as pension contributions are paid into a pension fund, not directly to the employee.
The implications of this decision will be relevant in the following circumstances:-
• where the cap of 52 weeks’ pay on the unfair dismissal compensatory award is less than £80,541 (the current monetary cap) before pension contributions are included;
• where an individual’s weekly pay not including pension contributions is less than the maximum weekly pay (currently £489) when calculating unfair dismissal basic awards or statutory redundancy payments;
• where the value of a week’s pay is not subject to a statutory cap (such as compensation under TUPE and protective awards for a failure to inform and consult).
The change will also be significant for employees who are members of a defined benefit pension scheme, where the employer’s contributions are likely to be higher than those made into defined contribution schemes. Employers should bear this judgement in mind when calculating statutory redundancy payments or potential liabilities when defending claims in the Employment Tribunal.
It is also worth noting how a week’s pay should be calculated for employees with irregular working patterns. We recently had a matter where an employee worked every other week. When calculating the maximum unfair dismissal compensatory award, it was necessary to ignore all weeks in which the employee earned nothing. This meant that the maximum compensation of 52 weeks’ pay was actually almost two years’ salary!