Practical Law

In June 2017, the Employment Appeal Tribunal’s (EAT) decision in the University of Sunderland v Drossou EAT/0341/16 changed the established practice regarding how Employment Tribunals (ETs) approach the calculation of a week’s pay for compensation purposes.

Prior to Drossou, the convention was that a week’s pay under the Employment Rights Act 1996 (ERA 1996) did not include employer contributions to the employee’s pension – in the case of Payne v Port of London Authority ET/155560/89 it was found at the ET (and was not considered further when the case went to the EAT and the Court of Appeal) that the payment had to actually be received by the employee to be included in a week’s pay. In Drossou, the ET and the EAT disagreed.  Both found that employer pension contributions should be included in a week’s pay. They relied upon the wording of section 221 of the ERA 1996, which refers to a week’s pay as “the amount which is payable by the employer under the contract of employment”.  The EAT was clear that section 221 does not distinguish between sums received by the employee and those paid only for their benefit.

The EAT contrasted section 221 with the wording in section 27(1) of the ERA 1996, in respect of unlawful deductions from wages.  Section 27(1) refers to wages as “any sums payable to the worker in connection with his employment”.  The EAT reasoned that this distinction was the legislature’s intention and found that the statutory language of section 221 must take precedence over convention.

Impact of the judgment

This decision will prove costly for employers, especially where employers pay high contributions as part of a defined benefit pension scheme.

There are, of course, many circumstances where a week’s pay is capped; for example, statutory redundancy payments, the basic award for unfair dismissal claims and the right to be accompanied at a disciplinary meeting.  This cap will continue to apply to the aggregated value of the salary and the pension benefits, so that this judgment will only affect those cases involving employees whose salary is below the cap (currently £489) or statutory claims where a week’s pay is uncapped; for example, where there is a failure to inform and consult in a redundancy situation (up to 90 days’ pay), or in a TUPE transfer (up to 13 weeks’ pay).

The wording of section 221 and the reasoning of the EAT is clear and it seems surprising that this issue has not come before the ET and EAT before now.  Whilst another EAT or the Court of Appeal could take a different view, it appears that this would require reading additional words into section 221 of the ERA 1996.

Following this decision, employers should be advised to take pension contributions into account in assessing liability when compensation is based on the definition of a week’s pay under section 221 of the ERA 1996.

Another area where this decision could have an impact is the calculation of holiday pay under the Working Time Regulations 1998 (WTR 1998). Under regulation 16, a week’s pay for annual leave is calculated in accordance with sections 221 – 224 of the ERA 1996.  It is on termination of employment, where a worker should be paid in lieu of any accrued but untaken holiday, where the Droussou case may be relied upon.  Employees could argue that the payment in lieu should be in respect of basic salary plus the employer’s pension contributions.  Whilst the context of such a payment is clearly different from that in Drossou, the fact that the WTR 1998 rely on the wording of the ERA 1996, subject to minor amendments regarding terminology, means it is difficult to see how an ET could differentiate a payment in respect of holiday on termination with a week’s pay under 221 unless, again, further words are read into the WTR 1998.

Reduction in basic award

The coverage of this case has focussed on the point above, but the appeal to the EAT also concerned the interesting issue of whether it was perverse not to reduce a basic award where a compensatory award had been reduced for contributory fault.

At the ET, the compensatory award made to Ms Drossou was reduced by 35%, however, no reduction was made to the basic award.  The University appealed and were successful on this point.  Whilst the test for reductions in basic and compensatory awards differ, the EAT found that only in exceptional cases would a differentiation between the two be justified. The EAT held that it would be perverse not to reduce the basic award to the same extent and so a reduction of 35% was applied to the basic award.