Employer pension contributions included in a week's pay

In the recent case of University of Sunderland v Drossou, the Employment Appeal Tribunal has held that employer pension contributions should be included in the calculation of a week’s pay under the Employment Rights Act 1996 (“the ERA”). Numerous payments and remedies are calculated based on the ERA definition of a week’s pay such as unfair dismissal compensation and compensation for a failure to consult on a TUPE transfer. This decision alters the established practice which was to exclude pension contributions from this calculation and thereby potentially increases the value of a week’s pay.

Under section 221(2) ERA, a week’s pay is the “amount which is payable by the employer under the contract of employment”. This has been interpreted in the past to exclude pension contributions on the basis that they are paid to the pension fund and not directly to the employee. The Employment Appeal Tribunal in this case held that that section 221(2) ERA did not specifically state that the amount payable by the employer had to be payable directly to the employee and consequently pension contributions should be included.

Comment

This case is significant as it changes the established practice on calculating a week’s pay under the ERA and consequently potentially increases the value of a week’s pay in some cases. Whilst this will have a limited impact where there is a statutory cap on a week’s pay (for example, statutory redundancy payments), it will impact payments and remedies where the value of a week’s pay is either below the statutory cap or not capped at all. For example, compensation for a failure to consult under TUPE is based on a week’s pay uncapped.

This decision will have a greater impact on employers that have a high employer contribution rate to their employees’ pension scheme, for example those employers who participate in defined benefit pension schemes.

Although this case may be appealed, for the time being, employers will need to consider the value of their pension contributions when calculating any sums due to employees by reference to a week’s pay under the ERA.