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Blog: Busting the cap?

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Catherine Greig

Catherine Greig looks at the implications of an EAT decision on employer pension contributions.

The Employment Appeal Tribunal has confirmed that employer pension contributions should be included when calculating “a week’s pay”. This is because “remuneration”* means a “reward in return for services”. Employer pension contributions are as much a part of this reward as basic pay is.

So when a compensatory award is made in an unfair dismissal case, the statutory cap will still be either (1) £80,541 or (2) 52 x a week’s pay, whichever is lower. However “a week’s pay” will now include employer pension contributions. The cap for an employee earning say, £60,000 with a 5% employer pension contribution, will now be £63,000 (£60,000 + £3,000).

Here are some other practical effects of the decision:-

  • The employer pension contribution for a final salary pension scheme may be in the region of 20% of salary. In the £60,000 example above, potentially the cap could increase from £60,000 to £72,000.

  • Presumably other non-cash benefits also amount to a “reward in return for services”. Is the next step to include the entire value of the employee’s package in the calculation of “a week’s pay”?

  • Redundancy payment calculations for lower paid employees (earning less than the current cap of £489 per week) will be affected.

  • Protective awards for a failure to inform and consult are also affected. The maximum award of thirteen weeks’ pay for each affected employee will increase to include the value of employer pension contributions.

  • Unlawful deductions claims are not affected. These rely on a different definition of “sums payable” and not “a week’s pay”.

    • If you are an employer currently in ongoing negotiations, defending a claim or calculating redundancy payments, be prepared for a recalculation of any figures which rely on this definition of “a week’s pay”.

    *section 221(2) of the Employment Rights Act 1996

    Blog: Busting the cap?

    • Catherine Greig is an associate at MacRoberts

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