Compensation | The Law at Work

Compensation

Under the provisions of s. 118(1) of the Act, an award for compensation must consist of a basic award and a compensatory award. In most cases, along with loss of statutory employment rights, these are the only categories of award that are considered.

Additional award

As outlined above, an Employment Tribunal may make an "additional award." For example, in cases where there was non-compliance with an order for reinstatement or re-engagement. An additional award may also be made for dismissals for reasons related to trade unions, health and safety and employee representatives.

Basic award

In most cases, a basic award will be the same amount as a statutory redundancy payment.

The maximum amount of a week's pay for the purposes of calculation is adjusted annually in April.

A week's pay is based on gross pay, and a basic award is calculated with reference to the continuous period of employment ending with the effective date of termination as follows:

For each year of service below the age of 22, half a week's pay for each year.
For each year of service, not below the age of 22, weekly pay is multiplied by 1.
For each year of service not below the age of 41, the weekly pay is multiplied by 1.5.

The maximum number of years to be taken into account for a basic award is twenty. Therefore the absolute maximum that can be awarded is twenty years at the relevant weekly rate of gross pay, multiplied by 1.5.

Under the provisions of s. 122 of the Act, in certain cases, a basic award may be reduced as follows:

Where the Claimant unreasonably refuses an offer of reinstatement.
Where the Claimant's conduct before dismissal makes a reduction just and equitable.
Where the Claimant has been dismissed for redundancy and has received a redundancy payment.

As of February 2017, in a number of specified cases, the amount of a basic award will not be less than £5,853 where the effective date of termination is on or after 6 April 2016. This will apply when a dismissal is unfair because the Claimant was dismissed as follows:

On the grounds of trade union membership or activities.
For carrying out legitimate health and safety activities as a safety representative.
For carrying out functions as an occupational pension scheme trustee.
For carrying out functions as an elected employee representative.

Moreover, if a dismissal is unfair because the Claimant was dismissed in relation to blacklisting on the grounds of trade union membership or activities, the amount of the basic award will not be less than £5,000.

With effect from 29 July 2013, the maximum amount of compensation that a Claimant may be awarded is the lower of the statutory maximum amount or 52 weeks gross pay. This applies to dismissals, where the effective date of termination was on or after 6 April 2016. Where the effective date of termination occurred prior to 6 April 2016, the amount is £78,335 or 52 weeks gross pay.

Under the provisions of s. 123(1) of the Act, the actual amount of compensation is the amount that an Employment Tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the Claimant as a consequence of the dismissal insofar as that loss is attributable to the Respondent.

Automatically unfair dismissal

There is no statutory maximum for compensatory awards in cases where a Claimant is automatically unfairly dismissed for the reasons set out in the following sections of the Act:

s. 100 in health and safety cases.
s.103(A) in public interest disclosure cases.
s. 105(3) in relation to selection for redundancy on the grounds of health and safety activities.
s. 105(6)(a) in relation to selection for redundancy on the grounds of public interest disclosure.

Heads of claim

The most common heads of claim are as follows:

Immediate loss

The loss of wages based on the Claimant's weekly take-home pay from the effective date of termination until the date of the final hearing.

Future loss

The loss of wages based on the Claimant's weekly take-home pay for as long as an Employment Tribunal considers to be reasonable, including consideration of the length of time the Tribunal believes that the Claimant will remain unemployed. The award should take into account any future pay rises or other employment benefits the Claimant would have received if it wasn't for dismissal.

In Scope v Thornett [2007] IRLR 155 CA, the Court of Appeal stressed that the assessment of future loss of earnings inevitably involves an element of speculation. On that basis, the Court of Appeal held that the EAT had erred in overturning an Employment Tribunal's decision that a Claimant's employment would have come to an end within six months even if the Claimant had not been dismissed.

Benefits in kind

This includes medical insurance, company car and other similar fringe benefits etc.

Pension rights

Where a Claimant was a member of an occupational pension scheme, the Claimant will suffer a financial loss because any deferred pension payable will be based on the Claimant's salary at the date of dismissal instead of the Claimant's normal retirement age.

Loss of statutory employment rights

This is a nominal award that takes account of accrued employment rights. For example, there will be a qualifying period of employment before an employee is entitled to a number of statutory rights such as the right not to be unfairly dismissed, the right to a statutory redundancy payment, or right to request flexible working etc. The award is intended to compensate a Claimant for the loss of such rights. A nominal amount is generally awarded in the region of £250 to £500.

Injury to feelings

With one exception (see protected disclosure below) in unfair dismissal claims, a Claimant cannot be awarded compensation for injury to feelings as a result of the manner of dismissal.

In Johnson v Unisys Ltd [2001] IRLR 279 HL, the House of Lords held that although the Claimant had been unfairly dismissed, there could be no compensation for the manner of the dismissal if it would exceed the statutory maximum as set out in the Act. While a common law right for full compensation for breach of contract might exist, it could not circumvent the intention of Parliament in laying down limits to compensation for dismissals.

Protected disclosure

An award for injury to feelings in protected disclosure claims should be distinguished from awards for injury to feelings that relate to a Respondent's actions before dismissal.

In Melia v Magna Kansei Ltd [2006] IRLR 117 CA, the Claimant was constructively unfairly dismissed and was successful in a whistle-blowing claim in which the Claimant suffered a detriment as a result of having made a protected disclosure. The Court of Appeal held that an injury to feelings award for the detriment that the Claimant suffered should be assessed up to the date of the dismissal.

Contributory factor and reductions

Under the provisions of s. 123 of the Act, there are a number of circumstances where the level of compensation awarded can be reduced or even eliminated altogether. This may occur when:

An Employment Tribunal finds that the conduct of the Claimant contributed to a dismissal.
There was a failure by the Claimant to take adequate steps to mitigate any loss.
The Tribunal considers it just and equitable to limit the award for some other reason.

If an Employment Tribunal considers that a Claimant has caused or contributed to dismissal, then the Tribunal is likely to reduce both the compensatory and basic award by a proportion that it considers to be just and equitable. This is referred to as "contributory factor."

Polkey reduction

An award for compensation may, in certain circumstances, be reduced by an Employment Tribunal. This concept has had a somewhat chequered history. Formerly, if a Respondent failed to follow a proper or fair procedure, a resultant dismissal would, on the face of it be unfair. However, in the past, a Respondent could avoid a finding of unfair dismissal if it could be shown that if a proper or fair procedure had been followed, it would have made no difference to the outcome and that the Claimant would have been dismissed in any event.

In Polkey v AE Dayton Services Ltd [1987] IRLR 503 HL, the House of Lords held the above approach was wrong. However, with effect from 1 October 2004, this was reversed by s. 34(2) of the Employment Act 2002, which restored the pre-Polkey position.

On 6 April 2009, the Employment Act 2008 reversed s. 34(2) of the Employment Act 2002 and restored the law on procedural fairness to that which was in place prior to October 2004. This meant that any procedural failing would usually render a dismissal unfair, but compensation could be reduced in proportion to the likelihood that the dismissal would have occurred had a fair procedure been followed.

Therefore, an Employment Tribunal will consider if a fair dismissal could have occurred at some stage in any event, and apply a percentage deduction to reflect this. If an Employment Tribunal cannot conclude what would have happened, the appropriate course is to assess compensation by evaluating the chance that the Claimant would still have been dismissed.

In Constantine v McGregor Cory Ltd [2000] ICR 938 EAT, the EAT held that an Employment Tribunal's finding that the Claimant would have been dismissed in any event did not mean that the Tribunal's failure to explain the potential remedies for unfair dismissal had no practical consequences. In addition, the Tribunal should have assessed compensation by evaluating the chance that the employee would still have lost his employment, rather than deciding the matter on the balance of probabilities.

By contrast, in Software 2000 Ltd v Andrews and others [2007] IRLR 568 EAT, the EAT held that, where an Employment Tribunal regards evidence as being too unreliable to determine if a dismissal would, on the balance of probabilities, have occurred, then for the purposes of s.98(2) of the Act (which has now been repealed) that evidence should still be taken into account when deciding whether to apply a Polkey reduction to the compensatory award.

In Steel Stockholders (Birmingham) Ltd v Kirkwood [1993] IRLR 515 EAT, the EAT held that it is only where the defect was procedural rather than substantive that such a percentage reduction can be made.

In Gover and others v Propertycare Ltd EAT/0458/05, the EAT held that it is incumbent on an Employment Tribunal to consider whether or not a Polkey reduction should be made to compensation for unfair dismissal. Moreover, in Gover and others v Propertycare Ltd [2006] EWCA Civ 286 CA. The Court of Appeal agreed with the EAT and stated that this forms part of an Employment Tribunal's overriding obligation to award such compensation as is just and equitable.

Mitigation of financial losses

A Claimant is under a duty to mitigate any financial loss and must take reasonable steps to find alternative employment. If a Claimant has not taken reasonable steps to find alternative employment, an Employment Tribunal will reduce compensation to reflect what, in the view of the Tribunal what would have happened if the Claimant had taken reasonable steps.

In Cooper Contracting Ltd v Lindsey EAT/0184/15, the EAT held that a Respondent must show that a Claimant has acted unreasonably in failing to mitigate, rather than requiring the Claimant to take all reasonable steps to lessen the loss.

Since the burden of proving a failure to mitigate will be on a Respondent, Claimants should expect a Respondent to produce evidence at a final hearing of alternative employment that would have been available to the Claimant.

Notice and pay in lieu of notice

In Hardy v Polk (Leeds) Ltd [2004] IRLR 420 EAT, the EAT held that a Claimant who is dismissed without notice or pay in lieu of notice is under a duty to mitigate against loss in respect of the notice period. In effect, any earnings received from another employer during the notice period (or what would have been the notice period) must be offset against any compensation.

By contrast, in Voith Turbo Ltd v Stowe [2005] IRLR 228 EAT, another division of the EAT declined to follow Hardy, and held that an unfairly dismissed Claimant was under no duty to give credit for earnings achieved in new employment during a period in respect of which the Respondent had made a payment in lieu of notice.

Notwithstanding the above case, in Morgans v Alpha Plus Security Ltd [2005] IRLR 234 EAT, the President of the EAT affirmed the approach in Hardy.

The matter was finally resolved by the Court of appeal in Burlo v Langley and another [2007] IRLR 145 CA, in which the Court held that in assessing unfair dismissal compensation, an Employment Tribunal should not make any deduction to reflect earnings from another employer during the notice period.

This precedent does not apply in cases of constructive dismissal. In Stuart Peters Ltd v Bell [2009] IRLR 941 CA, the Court of Appeal held that when compensation for constructive dismissal is assessed, credit should be given for earnings during the notice period.

In Burlo, the Court also rejected the proposition that it was appropriate to take into account other aspects of good industrial practice when assessing the compensatory award. It was held that even if good industrial relations practice required an employee who was summarily dismissed while on sick leave to receive pay in lieu of notice at the normal rate of pay as opposed to the rate of statutory sick pay, that precept could not be taken into account in the assessment of compensation.

Contractual liability and ex-gratia payments

Payments made either under a contractual liability by the employer, or an ex-gratia payment will generally be taken into account to reduce the compensatory award. Therefore, this will include any pay in lieu of notice.

Calculation of compensatory award

In Digital Equipment Co Ltd v Clements (No.2) [1998] IRLR 134 CA, the Court of Appeal stated that the order of deductions in respect of a compensatory award should be calculated by an Employment Tribunal as follows:

Calculate the total loss actually suffered.
Deduct amounts received in mitigation and any payment made by the Respondent.
Make any Polkey deduction.
Make any reduction for contributory fault.
Apply the statutory maximum.

Recoupment of state benefit

Under the provisions of the Employment Protection (Recoupment of Job Seekers Allowance and Income Support) Regulations 1996 (SI 1996/2349) a Respondent will be ordered to pay part of the compensation awarded to the authority that paid certain state benefits, for example, the Department of Work and Pension so that any state benefit paid is recovered. However, this does not apply to a sum in settlement of a claim.

In Sheffield Forgemasters International Ltd v Fox; Telindus Ltd v Brading [2009] IRLR 192 EAT, the EAT held that (subject to the rule against double recovery) receipt of incapacity benefit by a Claimant did not of itself preclude an award of compensation for loss of earnings during the same period. The mere fact that someone is deemed "incapable of work" for the purposes of incapacity benefit does not mean that this individual is, in fact, unable to work.

Enforcement of Employment Tribunal awards

If a Respondent fails to comply with a remedy order for the payment of money, the order can be enforced by the Claimant by making an application for an "extract of the judgement" which can then be enforced by Sheriff Officers.