Fri 25 Aug 2017

Employer pension contributions count towards a week's pay

The long standing practice when calculating a week's pay is that employer pension contributions are not included.  Or it was until the EAT recently considered the matter…

Prior to the case of University of Sunderland v Drossou there was no appellate authority on the question of whether the calculation of a week's pay (as set out in the Employment Rights Act 1996) should include employer pension contributions.  The amount of a week's pay is relevant when calculating redundancy payments and certain employment tribunal awards. The long standing practice, based on the fact that employer pension contributions are paid into the pension fund and not directly to the employee, was that employer pension contributions should not be included.

In Drossou the EAT considered this matter.  Ms Droussou had made a successful claim for unfair dismissal against the University and had been awarded reinstatement.  When the University did not comply with the order compensation was awarded instead (in such circumstances the Tribunal can make an additional award of between 26 and 52 weeks' pay).  The Tribunal considered how to calculate a week's pay for the purposes of calculating the additional award.  They were of the view that remuneration means a reward in return for services and pension contributions are no less a reward for service than basic pay.  Accordingly, they included the employer pension contribution when calculating a week's pay for the purposes of quantifying compensation.

The University appealed this decision but the EAT dismissed the appeal and expressly endorsed the Tribunal's reasoning in relation to the meaning of remuneration. 

A week's pay is currently capped at £489 and this decision does not alter the level of the cap. It will mean though that employees who earn less than £489 per week may receive more than they previously would have due to employer pension contributions also being taken into account. However, the cap does not apply when an award is made for (1) a failure to collectively consult in a collective redundancy situation or (2) for a failure to inform and consult under TUPE. As such, the level of awards in those two areas will increase.

This case is of particular significance to employers who provide a defined benefit pension scheme (i.e. a final salary scheme or a career average scheme) where employer contributions are significantly higher than for defined contribution schemes (i.e. a money purchase scheme).  A survey by the Office of National Statistics found that the average total contribution for a defined benefit scheme was 21.2% of pensionable earnings.

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