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Merlin House, 1 Langstone Business Park
Newport

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For more than 10 years we have provided companies of all sizes and in a variety of sectors with uncomplicated, innovative and affordable human resources advice and on-site support ensuring that your people are an asset to your company and not a liability.

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With the National Minimum Wage (NMW) now almost fifteen years old, and with another increase pending on 1st April 2017 HMRC have issued a list of the most elaborate excuses they've been given by employers for not paying the appropriate rates:

What Counts Towards a 'Week's Pay' When Capping ET Compensation?

Alan Kitto

Sections 221 - 229 of the Employment Rights Act 1996 are used to calculate a 'week's pay' for an employee for the purposes of determining the upper limit on the compensatory award for unfair and constructive unfair dismissal claims (for dismissals after 29th July 2013), which is the lower of 52 'week's pay' or currently £78,962.00.

A claimant's losses will be calculated according to the sums that they could reasonably have expected to received, had they remained in employment. This can include bonus payments (even if they are discretionary) and/or commission.

The extent to which commission and bonus payments may be taken in to account in calculating a 'week's pay' (i.e. when applying the statutory cap) is often difficult to determine under the Employment Rights Act 1996, but there are three key questions:

  1. Does the worker have normal working hours? If not, the bonus or commission will always be taken into account.
  2. Assuming the worker has normal working hours, does the payment in question form part of the worker's entitlement for working those hours, or is it something extra? If it counts as pay for normal working hours, it must be taken into account.
  3. If the worker has normal working hours, and the payment is not part of their entitlement for working those hours, can it be said that pay varies 'with the amount of work done'? If pay varies according to some criterion other than the amount of work done, such as whether that work has generated income for the company, the payment will not be taken into account.

In Evans v Malley Organisation Ltd t/a First Business Support, Mr Evans was a salesman who earned a low basic salary plus commission of 25% on sales achieved. The Court of Appeal held that he was only entitled to holiday pay based on his basic salary. His pay varied not with the amount of work done (as would be the case with someone paid for piece work), but with the success of this work; the commission became payable when the new client had paid 25% of the sum due to the employer (which usually occurred around nine months after the contract had been concluded). The court commented that any commission due to Mr Evans was payable by virtue of earlier success, many months previously. Therefore, for commission or bonuses to be taken into account in assessing a week's pay under the ERA 1996, it must be a reward for effort (that is, work done), rather than for past success. In practice, this is not always an easy distinction to draw. Lady Justice Hale provided the following guidelines for determining whether remuneration varies with the amount of work done:

  1. "Work done" would ordinarily mean tasks undertaken, such as researching potential clients, making telephone calls, writing letters and meeting potential clients. It would not mean success achieved. Although work done will often lead to success achieved, this does not mean that the words have the same meaning.
  2. The "amount" of work done refers to its quantity and not to its quality or results.

Whilst this judgement would unlikely hold now in the light of the recent Lock v British Gas ECJ judgement in respect of holiday pay, it still very much applies when calculating the statutory cap on compensatory awards in unfair and constructive dismissal claims.

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