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Unfair dismissal awards increase (particularly for some employers)

When working out what an unfair dismissal may cost, you will need to factor in employer pension contributions in the cap – not just standard pay.

An important Judgment of the Employment Appeal Tribunal means that in most cases the maximum unfair dismissal award will increase. Those increases may be particularly significant for those employers with generous pension provision or Defined Benefit schemes. 

The maximum amount of a compensatory award for unfair dismissal is capped at one year’s pay (or £80,541 whichever is lower). In University of Sunderland v Drossou the EAT has decided that when a year’s pay is calculated, employer pension contributions must be taken into account as well as the payments made directly to the employee. This may significantly increase the potential award for many employees. For example, for almost all public sector employees their potential award is likely to increase by at least 14% (and in some cases more).

The facts

Ms Drossou was dismissed from her position as Senior Lecturer and Programme Leader by the University of Sunderland. The dismissal was found to be unfair. The argument in this appeal was about the cap which applied to her compensatory award for unfair dismissal. The compensatory award is based upon the employee’s losses, but since 2013 that award cannot be more than 52 weeks pay of the person concerned (or £80,541).  The standard practice prior to this Judgment had been that employer pension contributions which were paid to a scheme and not to the employee, would not be taken into account in working out a week’s pay (and therefore the cap). However the Tribunal in this case did take the University’s pension contributions into account when calculating the cap, and the EAT has now held that they were right to do so.

What does this mean for me?

When an employee is arguing that they have been unfairly or constructively dismissed, the maximum amount they are likely to recover will be important as it will govern their expectations and your potential exposure. This Judgment will increase that maximum figure. The year’s pay cap will now include what you as the employer contribute to a pension scheme on their behalf.  The more significant the contribution the greater the impact this will have for you. It will increase employee expectations and may mean a higher offer is required to achieve settlement where you wish to resolve matters. When working out what an unfair dismissal may cost, you will need to factor in employer pension contributions in the cap – not just standard pay.

For employers with DB schemes (including those in the public sector) it may remain open to some argument about precisely what this means in terms of contributions (as they can often fluctuate and for those in some schemes such as the LGPS will vary based upon membership profile and categorised risk). However, as an example, with this Judgment the amount an employee in the NHS or Teachers pension scheme can recover if unfairly dismissed appears to have been increased by 16/14% overnight.

Comment

Please do remember that many claims do not have a cap (including those for discrimination) and almost all employment-related awards are based on actual loss.  However for unfair dismissal the cap on the potential award has provided some reassurance when you are faced with a difficult dismissal decision.  This Judgment increases that potential exposure. That increase may be relatively small for many of you, but for those of you with generous employer pension contributions or expensive DB schemes the increase may be significant.  The same principle will also apply: where you are working out statutory redundancy payments (for those whose pay otherwise might be below £489 per week); to calculating basic awards on unfair dismissal; and to awards for failing to consult on redundancy or TUPE (which are based upon an actual week’s pay so that may be significant for high earners with larger employer pension contributions).

If this case raises any issues for your organisation or you would like assistance in identifying the maximum amount an employee could recover if unfairly dismissed, please speak to your usual contact in the Weightmans employment, pensions and immigration team, or contact Phil Allen (phil.allen@weightmans.com)