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  • Overview

    Whilst this decision cannot compete with the recent employment tribunal fees ruling in terms of consequences for employers, it does go against over 20 years of established practice and will come as a shock to most employers.

    According to the employment appeal tribunal (EAT) in a recent ruling, the calculation of a week’s pay for the purposes of statutory payments, such as redundancy payments, should include employer pension contributions.  This is contrary to longstanding established practice. 
    Establishing the value of a week’s pay is relevant for, in particular:

    • statutory redundancy payments;
    • maximum possible unfair dismissal compensatory awards;
    • compensation under TUPE for a failure to inform and consult; and
    • compensation, known as a ‘protective award’, for failure to comply with information and consultation obligations where 20 or more employees are at risk of redundancy.

    It has been longstanding practice to base a week’s pay on gross wages only and not to include employer pension contributions on the basis that they are not received directly by the employee but are paid into the pension fund.

    But the matter had never been considered at EAT level until now.  The EAT said that a week’s pay should include a week’s worth of employer pension contributions.  It reviewed the precise wording of the Employment Rights Act and found that as pension contributions are no less a reward for services than wages, they should be included in the calculation of a week’s pay.

    Employers will need to immediately alter how they calculate various statutory payments.  In some cases a week’s pay for statutory purposes is capped, such as for statutory redundancy payments, currently capped at £489.  So for those employees already earning more than the cap, this will not change anything. 

    But for those payments where a week’s pay is not capped, such as the unfair dismissal compensatory award limit, compensation payable under TUPE and in relation to mass redundancies (bulleted above), employers could suddenly find themselves having to pay awards of greater value than previously anticipated.

    This could be particularly onerous for employers who contribute towards a defined benefit (final salary) pension scheme.  The average employer contribution to such schemes is around 20%, so for some employers this could have a real impact.

    If you would like to discuss this issue further, then please do not hesitate to contact Ben Stepney in the employment team. The case discussed in this article is University of Sunderland v Drossou (EAT).

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