Employer pension contributions to be included when calculating a 'week’s pay’

In a change to existing practice, the EAT has confirmed that employer pension contributions must be taken into account when calculating a week’s pay, which will apply to statutory redundancy pay, statutory notice pay and unfair dismissal compensation.

29 August 2017

When an employee is successful in bringing a claim in the employment tribunal, the judge will often stipulate that their compensation should be calculated by reference to a ‘week’s pay’. Current practice has been to leave employer pension contributions out of such calculations, as these are not directly paid to the employee. However, in the recent case of The University of Sunderland v. Ms. Droussou, the EAT has upheld the employment tribunal’s decision that employer pension contributions were to be included in weekly pay calculations. This has the potential to have wide-reaching consequences, as it will affect payment such as minimum statutory notice pay, statutory redundancy pay and unfair dismissal compensation where an employee’s salary falls under the statutory cap.

In this case, an employment tribunal found that Ms. Droussou had been unfairly dismissed from her workplace, and ordered her employer to pay compensation, including pension contributions in the calculation of a week’s pay. The reasoning given for this change of practice was:

  • the relevant statute does not say that the amount payable by the employer has to be payable to the employee, but just that it has to be payable by the employer under the contract of employment; and
  • the proper meaning of ‘remuneration’ is a reward in return for services, and pension contributions are also a reward for service.

The EAT agreed with the tribunal’s finding, and stated that employer pension contributions should be taken into account when calculating a week’s pay, except when looking at claims about unlawful deductions from wages (where the wording of the statute is slightly different). 

Impact on future cases and practice
Going forward, this has the potential to have far-reaching consequences. Several types of payment and remedies are calculated by reference to a week’s pay using the definition that the EAT ruled on in this case, including:

  • Statutory redundancy pay
  • Notice pay for periods of statutory minimum notice
  • Unfair dismissal compensation (where basic salary is below the current statutory cap, currently £489)
  • Compensation for failure to inform or consult in employment transfer or collective redundancy situations.

The judgment could have a significant impact on termination payments to departing employees, especially where an employer is making significant contributions to a defined benefit pension scheme.