Pension Contributions and Deductions from Wages

There is a pensions crisis in this country with far too few people saving for a pension, or where they are saving enough. One of the ways this has been addressed, arguably far too timidly, is by introducing Automatic Enrolment obligations on employers that impose a presumption that eligible workers will be enrolled with a pension scheme and employers must pay a minimum 3% contribution to the individual pension savings unless they expressly opt out of the scheme. This has meant that the number of workers who do have some ongoing pensions savings has significantly increased, even if there are still substantial gaps in coverage.

Inevitably however, employers being employers, either through wilful non-compliance or administrative failings sometimes do not pay the contributions they are obliged to pay. This post explores the legal position for an employee faced with this position.

On 12 October the employment tribunal’s decision in Lawson and Kabba v Tri-Fit Gym Ltd (2022) was published. The case arises out of the business interruption cause by Covid lock-downs and the claim involved allegations of breach of contract and unlawful deduction of wages. I will fast forward to the end of the case and highlight that the ET concluded that the employer had indeed failed to make the pensions contributions it was obliged to make and consequently ordered the employer to pay approximately £3,800 and £1,200 to the respective claimants.

The initial response of many an employment law minded person (it would be mine too) to circumstances such as these is that the employee may have unlawful deductions of wages claims. This is a statutory cause of action under section 13 of the Employment of Rights Act 1996 but, even though there was a deduction claim before the tribunal the pensions claim was not included in this, but as a free-standing breach of contract claim.

Why?

Although it is not discussed in the judgment the answer is that the EAT in Somerset County Council v Chambers (2013) determined that pension contributions do not constitute “wages” and therefore unable to be recovered as part of an unlawful deduction of wages claim:

Although it is well recognised in the European jurisprudence that entitlement to a pension is deferred pay that does not mean that an employer’s contributions to the pension fund on behalf of an employee amounts to ‘wages’.  As s.27(1)(a) makes clear, wages means any sums payable to the worker in connection with his employment, it does not mean contributions paid to a pension provider on his behalf.  On this footing his WA claim in relation to pension contributions necessarily fails, regardless of whether or not he was at the relevant times an employee entitled to membership of the Scheme. 

From paragraph 18 of the judgment in Somerset County Council v Chambers.

Interestingly, there is another EAT judgment appearing to say the opposite which is referenced in the judgment – Chambers v. Cromwell Group (Holdings) Ltd (1999). That case was distinguished in that it did not consider the relevant statutory definition in making its decision so was not binding on that point.

The effect of the Somerset County Council v Chambers decision is that no worker will be able to pursue a claim that an employer has not paid the pension contributions it should have paid under the unlawful deductions of wages heading. And this presumably explains why in the Lawson and Kabba case above recovery of the unpaid pensions was paid was pursued as a breach of contract case alone. I think there is a good case that that is unjust, and the right under section 13 of the Employment Rights Act 1996 should reflect the changed circumstances in a post automatic enrolment world where pension contributions are much more prevalent but, alas, that is not the current reality.

Some readers may well ask, so what? If the workers could get the money back anyway why does this matter? It’s a reasonable question. The problem is that the jurisdiction of the employment tribunal to hear breach of contract cases is extremely limited. A claim can only be entertained where employment has ceased (so this provides no protection for current workers) and only for a maximum of £25,000 – neither provision would apply to an unlawful deduction of wages claim.

Therefore, a worker faced with this situation can pursue an employment tribunal claim if they are no longer employed and the value is £25,000 or less (and the claim is within three months). If the employee is still employed, or cannot meet the other requirements then in terms of legal options they would need to pursue a claim in the civil courts (if less than £10,000) this would be likely to be at the County Court in the small claims track.

There may another alternative cost-free option available to workers, however. Any worker can complain (after exhausting internal complaints processes) to the Pensions Ombudsman that an employer has breached their obligations (such as pensions contributions have not been paid). A recent case published by the Ombudsman highlights this option (CAS-75166-S3Y9). In the case the worker, Mrs G alleged that her employer, Aten Global Ltd, had failed to pay over £1,200 in contributions to the pension scheme and the ombudsman upheld that allegation.

However, what is most noteworthy about the ombudsman required the employer to do three things (the second of which would be difficult to require from an employment tribunal, and the third impossible):

• The employer was required to pay the missing contributions in the pension scheme; and
• The employer was required to make good on the loss of fund increase that the worker would have received had the pensions been made at the time (arguably obtainable in a breach of contract ET challenge); and
• The claimant was awarded an additional £1,000 for significant distress the employer’s failures had caused her (compensation for distress is not available in a breach of contract or unlawful deductions case).

Therefore, if a worker alleges unpaid pension contributions, then, aside from available legal challenges a worker should also consider whether a Pensions Ombudsman complaint is a viable alternative course of action.

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