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Employment Law

Legal guidance - compliance - software

Veale Wasborough Vizards , 07 AUG 2017

Do Employer Pension Contributions Count Towards the Calculation of a Week's Pay?

Do Employer Pension Contributions Count Towards the Calculation of a Week's Pay?
Charlotte Williams
Solicitor,
Veale Wasbrough Vizards


In the case of University of Sunderland v Drossou, the Employment Appeal Tribunal (EAT) considered whether the long-established practice of excluding employer pension contributions... 

...from the calculation of a week's pay under the Employment Rights Act 1996 (ERA) was the correct approach to take.


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Facts

Ms Drossou, a Senior Lecturer at the University of Sunderland (the University), was dismissed from her employment and successfully brought a claim for unfair dismissal against the University.

The University failed to comply with the Employment Tribunal (ET)'s order to reinstate Ms Drossou and it was therefore ordered to pay her compensation instead. This included a basic, compensatory and additional award - all of which are calculated by reference to 'a week's pay'.

The University appealed against the ET's interpretation of a week's pay, which included employer's pension contributions.

Decision

It has been long established that the calculation of a week's pay for these purposes should not include employer pension contributions. This appears to be on the basis that employer pension contributions are not paid to the employee. Rather, they are sent direct to the pension fund.

However, the ET noted that the relevant section of the ERA which defines 'a week's pay' (section 221 (2)) does not refer to sums being received by, or paid to, the employee. It simply refers to "the amount which is payable by the employer under the contract of employment". The ET therefore considered that this included employer pension contributions.

The EAT upheld the ET's finding and agreed that pension contributions are no less a reward for service than basic pay and should therefore be included in the calculation of a week's pay under section 221(2) ERA.

By contrast, the EAT noted that section 27 of the ERA, which deals with the meaning of 'wages', does refer to sums payable to the employee, and therefore is distinguished.

What Does this Mean for Employers?

The decision in this case departs from longstanding practice which excludes employer pension contributions from the calculation of a week's pay. The decision will increase employers' liability in respect of compensation calculated by reference to a week's pay set out in section 221(2) ERA. This includes:

  • Statutory redundancy pay
  • Unfair dismissal compensation
  • Compensation under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)
  • Compensation under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA)

The decision will be particularly significant for those payments or remedies where the value of a week's pay is uncapped, where the pay of the employees involved falls below the statutory cap (currently £489), and where the employer contributes to a defined benefit pension scheme with a high employer contribution rate.

We await to see whether the EAT's decision is challenged. In the meantime, we recommend employers and employees adjust their calculations to take account of employer pension contributions and note the potential impact on claims for compensation.

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