Calculation of a week's pay should include employer pension contributions

In a recent judgment, the Employment Appeal Tribunal held that employer pension contributions should be included in the calculation of a week's pay for the purposes of the Employment Rights Act 1996 (ERA).

The decision is significant, as it increases the potential value of "a week's pay" in the calculation of certain awards under the ERA.

It will have a particular effect on remedies where the value of a week's pay is not subject to a statutory cap (such as with certain unfair dismissal basic awards, and with protective awards for a failure to inform and consult under TUPE).

The change will be significant for employees who are members of a defined benefit pension scheme, where employer contributions average 21%.

The background

Ms Drossou worked for the University of Sunderland, first as a Lecturer, and then as a Senior Lecturer. She was also a Programme Leader of International Management and Human Resources Management, before this role was handed to someone else in January 2013.

As a result of losing this role, Ms Drossou's relationship with the new Programme Leader (who also became Ms Drossou's line manager) was strained, and ended up deteriorating to the point where they each brought a grievance against the other.

Following an investigation, it was found that Ms Drossou was responsible for the breakdown of relations. She asked for mediation and redeployment somewhere else in the Faculty, but these suggestions were refused.

In October 2014, Ms Drossou was dismissed. She appealed this decision, but her appeal was also dismissed.

Ms Drossou took her case to the Tribunal and was found to have been unfairly dismissed.  An order was therefore made for her re-instatement. However, the University chose not to comply with this order, so the Tribunal made an order for compensation instead.

In calculating the compensatory award, the Tribunal took into account the pension contributions paid to Mrs Drossou's pension scheme by the University when working out the value of a week's pay. The University appealed this point as employer pension contributions are not usually included in the calculation of a week's pay on the basis that they are not received directly by the employee but are instead paid into the employee's pension fund.

The decision

The Appeal Tribunal held that the Tribunal's decision that employer pension contributions should be included in the calculation of a week's pay was correct, on the basis that "a week's pay" is the amount which is "payable by the employer under the contract of employment", which is not limited to what is payable directly to the employee.

The Appeal Tribunal also looked at the definition of "remuneration" in the ERA, deciding that it means "a reward in return for services" and that pension contributions are no less a reward for services than basic pay.

Employers now need to take account of the value of employer pension contributions when calculating any sum due to employees which is based on "a week's pay" under the ERA. 

This article has been written by Charles Pallot and Rachel Maddocks.

Send us a message