A week’s pay given value boost by EAT

The Employment Appeal Tribunal has surprised many in the legal community by holding that a week’s pay can include employer’s pension contributions.

The Employment Appeal Tribunal has surprised many in the legal community by holding that a week’s pay can include employer’s pension contributions.

Some industrial relations history

It seems that old orthodoxy about the calculation of a week’s pay can be traced back to a 1993 decision of the Court of Appeal in Port of London Authority v Payne. The underlying dispute concerned the redundancy of 17 dock workers whom the industrial tribunal found had been dismissed because of their trade union activities.

One of three points on appeal was whether it was possible to use a week’s pay as a multiplicand when calculating a special award under section 75A Employment Protection (Consolidation) Act 1978 (EPCA).

The problem (finally ironed out when the EPCA was amended by the Trade Union Reform and Employment Rights Act 1993) was that the week’s pay provisions in schedule 14 EPCA did not specify a calculation date for awards under section 75A.

The Court of Appeal was satisfied that this omission was an oversight, and ruled that the claimants were entitled to the benefit of a special award calculated by reference to the relevant multiple of a week’s pay, rather than being confined to the statutory minimum amount.

All this would appear to have very little to do with determining the components of the employee’s remuneration which should be taken into account when calculating a week’s pay. However the Court of Appeal, from paragraph 66 onwards, appears to endorse the industrial tribunal’s approach, which was to take the basic weekly gross pay as a starting point, excluding both overtime and employer’s pension contributions.

The EAT’s decision in Drossou

In Drossou v University of Sunderland the EAT took the view that any views expressed by the Court of Appeal on the relevant components of a week’s pay were obiter, leaving it free to decide the matter from first principles. In this case a week’s pay was needed to calculate the maximum compensatory award under section 124(1ZA) Employment Rights Act (ERA), currently set at the lower of £80,541 and 52 weeks’ pay.

The core of Mrs Justice Slade’s reasoning is that the relevant definition of a week’s pay for most salaried employees (now section 221(2) ERA) does not limit the calculation to remuneration actually received by the employee. Instead it is expressed in terms of the “amount which is payable by the employer under the contract of employment”. Her ruling is that this wording is broad enough to include payments made on an employee’s behalf to a third party if they are part of the employee’s “remuneration”.

To support her argument she contrasts the definition of a week’s pay with the definition of wages in section 27 ERA, which confines wages which are subject to the unlawful deductions regime to “sums payable to the worker in connection with his employment” (emphasis added).

Possible impact

This writer is indebted to Professor Smith (Employment Law Brief, New Law Journal 8 September 2017) for pointing out that the definition of a week’s pay has been with us since the Contracts of Employment Act 1963. Given that pensions have been with us for even longer than that, why has this point not arisen before?

One possible answer is that the point was in fact decided in Payne (pace Mrs Justice Slade). A more plausible explanation is that the assumption that a week’s pay equates to basic gross pay has never before been challenged head-on. The introduction of the cap of 52 weeks’ pay on the maximum compensatory award in July 2013 has now made this point worth particularly worth contesting for lower paid staff. But there have always been considerable sums riding on the definition of a week’s pay in relation to collective redundancies and TUPE, where there are often large numbers of individual claimants.

For many other awards, for example the basic award for unfair dismissal and statutory redundancy payments, the multiplier is likely to be significantly lower and there is also the dampening effect of the upper limit on a week’s pay, which applies in these and many other less well-known jurisdictions.

A week’s pay is also used to calculate statutory holiday pay, since the week’s pay provisions are incorporated from the ERA into the Working Time Regulations 1998 (but without the upper limit and with some other modifications). However, it is more difficult to see how Drossou could be applied here, since the basic principle in this jurisdiction is to award workers the same pay during holidays as they would normally have received while at work. Adding pension contributions into holiday pay makes little sense where these are still paid over to the pension fund during any holiday period.

All these factors point to their being further appeals, if not in this case, then in another where the same point arises. The EAT’s decision in Drossou is therefore unlikely to be the last word on this topic, but it will have certainly made an interesting contribution to the legal debate, whatever the final outcome.

This is an edited version of an article which first appeared in the New Law Journal on 29 September 2017

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