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

As employer pension contributions are not received directly by an employee but paid into a pension fund, it has been established practice to exclude such payments from the calculation of a week’s pay (for example when calculating statutory redundancy pay or holiday pay). However, in University of Sunderland v Drossou UKEAT/0341/16, the EAT has upheld the employment tribunal’s decision to include employer pension contributions in the calculation of a week’s pay.

Facts

In this case, Ms Drossou was dismissed by the University on the grounds of an irretrievable breakdown in working relationships. The tribunal found that she had been unfairly dismissed and ordered compensation. When calculating Ms Drossou’s compensation, the tribunal found that a week’s pay should include employer pension contributions. Upon the University appealing the decision, the EAT agreed with the tribunal’s reasoning and confirmed that a week’s pay should include employer pension contributions.

Comment

This case alters a longstanding principle increasing the value of a statutory week’s pay under the Employment Rights Act 1996. A number of payments and remedies are based on the statutory week’s pay and, consequently, these will be increased. These include:

• Statutory redundancy payments;
• Holiday pay under the Working Time Regulations;
• Compensation under TUPE, the protective award made for failure by the employer to inform or consult; and
• Basic award and determining the upper limit on the compensatory award made for a successful unfair dismissal claim.

The implications of this decision will be of particular interest to employers who make large contributions under a defined benefit pension scheme. The average contribution to defined benefit pension schemes is 21.2% according to a 2015 ONS survey. A week’s pay for employees who participate in these schemes could, therefore, potentially, be over a fifth as much before this ruling.

There may be further litigation to challenge the validity of the EAT’s judgment but, in the meantime, employers should be aware of the adjustment to the calculations.

If you have any questions around this briefing, please get in touch with your usual contact in our Employment Team or speak to Anna Dabek.

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