Employment Tribunal compensation changes

Posted by Sarah Peacock on
This article was originally written for Reward Strategy Magazine.

With the abolition of Employment Tribunal (ET) fees, more claims are inevitable. In successful claims, ETs award compensation based on well-established rules, some of which have recently changed.

Employer's pension contributions

In a successful unfair dismissal claim, compensation includes at least a "basic award" and a "compensatory award":

  • The basic award is calculated on the same set formula as statutory redundancy payments, and the cap on "a week's pay" is currently £489 per week. For those with normal working hours, "a week's pay" is defined in the Employment Rights Act 1996 (ERA) as "the amount which is payable by the employer under the contract of employment…if the employee works…his normal working hours".
  • The compensatory award looks at the loss attributable to the unfair dismissal and suffered by the individual. ETs determine what is "just and equitable", usually based on how long the individual is out of work or in a less well-paid job, taking into account how long it took/should take for them to obtain a new job at roughly the same pay. There is no cap on weekly pay when determining their losses, but there is an overall cap of the lower of £80,541 (uprated each April) or 52 weeks of their pay. "52 weeks' pay" is based on the definition of "a week's pay" mentioned above.

In University of Sunderland v Drossou, the Employment Appeal Tribunal (EAT) ruled that, contrary to current and long-established practice, "a week's pay" for the cap on the compensatory award should include the amount of the employer's pension contributions. The EAT justified this on the basis that the wording of "a week's pay" in the ERA did not specify the pay had to be payable "to the employee". This was contrasted with unlawful deductions of wages, also in the ERA, which specifically refer to "sums payable to the worker".

The result was that Ms Drossou was entitled to an increased compensatory award, because the cap of 52 weeks' pay (presumably as she earned less than £80,541) was increased to include her employer's weekly pension contributions.

Commentators have been surprised by this ruling. However the EAT noted that it was bound to look at the language of the legislation, rather than any conventional, previous practice. It could significantly affect employers with generous pension contributions or defined benefit schemes.

How might this affect other types of pay which refer to the ERA definition of "a week's pay"?

Employers' pension contributions should arguably be included to increase:

  • Basic award or redundancy payments for those earning less than £489 per week;
  • Uncapped compensation, such as for failure to inform and consult under TUPE, or a protective award for collective redundancy consultation failures;
  • Statutory notice payments, even where a pay in lieu of notice clause might provide for basic salary only.

It could also impact on holiday pay under the Working Time Regulations 1998, which is calculated on the basis of "a week's pay" under the ERA. Whether this, in particular, will be affected remains to be seen. When holiday is taken, most employers continue pension contributions. There are, however, potential arguments that, based on the specific legislation wording and this decision, pension contributions should be paid to the worker as well during holiday, and for any accrued untaken holiday on termination. Employers are likely to resist this on the basis that the case was decided in a different context and that such workers would be getting "double recovery".

Compensation for injury to feelings

Where an ET finds there has been discrimination, it may award damages for "injury to feelings" as well as compensation for actual losses arising from discriminatory treatment. Case law has established 3 separate "bands", depending on the seriousness of the discrimination. For claims presented on or after 11 September 2017, these bands have been uprated to:

  • Lower band: £800 to £8,400
  • Middle band: £8,400 to £25,200
  • Upper band: £25,200 to £42,000 (or more in exceptional cases).

Employee's pension losses

Revised guidance on calculating pension loss in successful ET claims was published in August this year. The guidance is designed to assist ETs in what are sometimes complex calculations for pension loss as a result of e.g. unfair dismissal. However the guidance was rarely updated and was withdrawn in 2015 when it was ruled by the Court of Appeal as no longer reliable. The new revised guidance follows consultation and includes worked examples.

Taxation of termination payments

Finally, you may recall that the Government had proposed changes to the taxation of termination payments, so that employers would be required to deduct tax based on an amount equivalent to the employee's basic pay for any notice period not worked, removing the possibility of the employer being able to make a payment in lieu of notice tax-free in certain lawful limited circumstances (where it amounts to damages for breach of contract). These proposed changes were dropped in March in order to get the Finance Act 2017 through Parliament in time for the General Election. However, we now know that the provisions have been resurrected in the Finance Bill 2017-19 and confirmation of them is likely to be announced in the Autumn Budget on 22 November. They are due to be implemented in April 2018, along with National Insurance changes which will make all termination payments subject to class 1A national insurance contributions above the £30,000 threshold.

Key points:

  • Compensatory awards for unfair dismissal claims could be significantly increased, especially for employers with generous pension contributions or defined benefit schemes;
  • The ruling in Drossou could affect other payments where the amount is based on the ERA definition of "a week's pay", including, potentially, holiday pay;
  • Employers should note the higher bands for injury to feelings awards and revised pension loss guidance for successful claims.

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Sarah specialises in all aspects of employment law, including health and safety, offering comprehensive and pragmatic commercial advice.

Sarah Peacock
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