Accruals, deductions and tax : they all add up - Case Round-Up: June 2017

In this month's round-up, Mark Shulman, consultant solicitor with Keystone Law, looks at calculating the cut-off for unlawful deductions claims when there is a series of deductions, the rate at which annual salaries accrue and grossing up for income tax on ET compensation.

Mark Shulman*, Consultant Solicitor at Keystone Law

As with so many issues in employment law, the devil is in the detail. Whether considering the amount of unlawful deductions claimed, the amount of pay to be deducted for a day of strike action or undertaking a grossing-up exercise on ET compensation, they all require some form of calculation. This article looks at recent case decisions addressing these issues.


**Series of deductions
*Does a gap of three months always break a series of deductions for the purpose of assessing a time bar in wages claims? Yes, said the EAT (sitting in Scotland) in [Fulton & Ors v Bear Scotland Ltd ]()*UKEATS/0010/16/JW (subject to the "reasonable practicability" rule).

In the earlier case of [Bear Scotland Ltd v Fulton and another ]()[2015] ICR 221, Langstaff J said that a "series of deductions" for the purpose of section 23(3) of the ERA 1996 required sufficient factual and a temporal links. He said that the legislative context was that " … a period of any more than three months is generally to be regarded as too long a time to wait before making a claim" (emphasis added). In the present appeal it was argued that there might therefore be some other context (e.g. factual) which meant the general rule about breaking the series of deductions did not inevitably apply.

The question for the EAT was whether the earlier case authority meant that there was a rule from which there could be no deviation (subject to the "not reasonably practicable" test for an extension of time), or whether it provided a strong but rebuttable presumption such that the ET was required to explore and to consider both the factual and temporal links between a series of deductions in every case before deciding whether they fall within the limitation provision.

The EAT said that Langstaff's earlier decision on the "three-month rule", was just that – a rule and not a presumption. Where the deduction was not in fact known within three months of it being made, there was a statutory exception to extend time where it was "not reasonably practicable for a complaint" to be presented within three months (s. 23(4)).

Whether or not there was a series of deductions is a question of fact. In the present case there had been agreement between parties about the relevant facts. Had the dates or circumstances of holidays taken been in dispute, there might have been scope for an argument about whether the ET had correctly applied the law to the facts. But in the absence of any dispute, the ET did what it was bound to do and excluded those claims or parts of claims where there had been a gap of three months or more between two successive alleged non- or under- payments. Once the ET was satisfied that the temporal link was broken, the factual similarities of various deductions were irrelevant. They could only have been relevant if the EAT's previous decision had indicated that factual similarities (comprising a series of deductions) were sufficient on their own. But the previous EAT authority was to the opposite effect i.e. a non-payment occurring more than three months later could not be part of a series of deductions - even if there were similar features. Accordingly, a gap of more than three months meant that the passage of time had itself extinguished the ET's jurisdiction to consider a complaint.

*Argawal* Update
*In our [April 2017 Case Round-up ]()we reported on the case of [Agarwal v Cardiff University & Anor ]()UKEAT/0210/16/RN. That case held that an unlawful deductions claim cannot be made in the ET if the relevant contractual provisions have to be interpreted to determine the amount properly payable. However, in the recent case of [Weatherilt v Cathay Pacific Airways Ltd ]()*UKEAT/0333/16/RN the EAT has decided that an ET is entitled to determine issues relating to the construction of the contract or the implication of any term to decide whether there has been an unlawful deduction from wages.

In Weatherilt the Claimant contended that Argawal was inconsistent with the decisions of the Court of Appeal in Delaney v Staples [1991] ICR 331 (which dealt with the statutory predecessor provisions of what is now section 13 of the ERA 1996) and Camden Primary Care Trust v Atchoe [2007] EWCA Civ 714, where the Court of Appeal had made it clear that in order to apply section 13, an ET might be required to consider whether there was an implied term of the contract.

Neither of these decisions in Delaney or Atchoe had been drawn to the attention of Slade J in Agarwal.

The EAT in Weatherilt agreed with the Claimant, saying that these cases are binding authority which the EAT and ETs are required to follow.

The case also confirms that ETs do not have exclusive jurisdiction to determine questions of contractual interpretation. A worker is not compelled to proceed by way of an unlawful deduction from wages under the ERA 1996. He or she can bring a simple claim in contract for unpaid wages in the civil courts or seek a declaration; likewise an employer may seek a declaration as to the meaning of a contractual provision.

**A day's pay
*Was a County Court right to decide that a day's pay withheld from teachers for a day of strike action was 1/260th of annual salary? No, said the Supreme Court in [Hartley & Ors v King Edward VI College ]()*[2017] UKSC 39, ruling that the appropriate fraction in that case was 1/365th.

The appellants were employed as teachers at a sixth form college. They were paid an annual salary on a monthly basis. Their contracts of employment incorporated a collective agreement known as the Red Book. Under the Red Book teachers were required to work up to 195 days a year of "directed time" which included teaching and other duties as directed by the Principal. The teachers were also required to work for an unspecified amount of undirected time which included work such as marking of students' work, writing reports and the preparation of lessons.

Following a one-day strike, the teachers concerned were docked one day's pay. Although the Red Book stated that pay may be withheld in respect of strike action, it did not specify the relevant amount for a day's pay. The College deducted pay at the rate of 1/260th of the teachers' annual salary.

In County Court proceedings for breach of contract, the teachers claimed monies owed to the extent that the deductions from their pay exceeded 1/365th of their annual wage entitlement. They argued that the appropriate amount was 1/365th in accordance with the Apportionment Act 1870 ("AA"). Section 2 of that Act provides that all annuities (which includes salaries) "shall…be considered as accruing from day to day, and shall be apportionable in respect of time accordingly".

*1/260th or 1/365th?
*Who was right? The Supreme Court held that the 1/365th as contended by the teachers was correct on the facts. Section 2 of the AA was a deeming provision that their salary payments accrued day by day at an equal rate. In the present case, given the wide scope of the responsibilities of teachers, none of them carried out all of their work during directed time. Much of their work took place in undirected time outside of the normal college day. Therefore, the difficulty with 1/260th was that given that the work done by the teachers was not limited to work during week days, it made no sense to choose a calculation of 1/260th of the annual salary, which assumed only weekday working.

The 1/365th figure achieved a result that was "broadly fair". It recognised that the monthly salary payments included periods when the teachers were on holiday and that the work carried out was spread throughout the year. The salary was not limited to periods when the teachers were carrying out directed work, but included other work which involved working during the evenings and weekends. The expression "'from day to day' in the section 2 deeming provision of the Act was correctly to be interpreted as meaning calendar days and not working days.

Express stipulation
But, section 7 of the AA provides that the Act does not apply where it is "expressly stipulated that no apportionment shall take place". What constitutes an express stipulation? The Supreme Court stated that "there must be an express provision in the contract which has the effect of disapplying the statutory formula so that "no apportionment shall take place".  Therefore, absent an express contractual provision to the contrary, the principle of equal daily accrual would apply. There was no express (or indeed implied) stipulation in the teachers' contracts excluding the statutory apportionment and so section 7 had no application.

Accordingly, section 2 of the AA applied and the correct deduction was 1/365th of salary in respect of deductions for a strike day.

Firstly, the Supreme Court accepted that the 1/365th rate would be different if the contracts were not annual contracts and would depend upon the terms of the particular contract.*

*Secondly, employers will wish to consider the full implications of this case in terms of potentially reviewing existing employment contacts as well as contracts intended for new staff. Such a review would examine what (if anything) the contracts specify in terms of accrual of salary. For example, workers with regular 9-5 type jobs who are paid an annual salary and have weekday working only (unlike the position in the teachers' case where the hours worked were irregular and not only on weekdays), a specific contractual stipulation with reference to accrual of salary on the basis of 260 working days a year might be appropriate. The parties can then be clear about the basis of any relevant deductions from salary should the situation arise. Otherwise, if calendar day to day accrual is specified (or where the contract is silent on the point and there is no other inconsistent contractual provision), the result would be daily salary accrual at the rate of 1/365th of annual salary for these employees.
Grossing up
Had an ET correctly grossed-up its unfair dismissal compensation award? No, said the EAT in [PA Finlay & Co Ltd v Finlay ]()UKEAT/0260/14/BA.

The Claimant was awarded a net sum of £166,318 after his successful claim of unfair dismissal for (amongst other things) making protected disclosures. That sum was grossed up by the ET at a flat rate of 40% to £257,196 to account for the tax that would be payable (after the £30,000 tax free element). The compensation was paid to the Claimant in the 2013/14 tax year. The tax rates applicable for that tax year were 20 per cent on the first band up to £32,010, 40 per cent on the next band up to £117,990 and 45 per cent on the excess above that sum.

The EAT agreed that the grossing-up calculation performed by the ET was incorrect because it applied a simplistic flat rate for tax at 40%. The correct figure for the grossed-up amount was in fact £252,574.55. This was £4,621.45 less than the amount calculated by the ET. In tabular form, the calculation was as follows:-

**Tax bandings**


**Income Tax**


Up to £32,010 @ 20%




Next £117,990 @ 40%




Earnings over £150,001 @ 45%




Total per amended Tax Return




Add: tax free amount




Total Award Grossed Up




When calculating grossed-up figures for compensation, this will need to take account of the actual tax bands for the relevant year (as illustrated in the table above) so that the applicable percentages for the relevant tax year are applied to different elements of the award, instead of a single percentage rate. The EAT confirmed that the relevant tax year for these purposes is the tax year in which the award is received by the Claimant.*

The grossing-up and tax calculations for the EAT appeal in the present case were undertaken by a member of the Institute of Chartered Accountants and so it might be necessary to seek specialist assistance when carrying out such calculations.
Mark Shulman is a Consultant Solicitor with Keystone Law and an accredited workplace and employment mediator. His blog on new employment legislation can be found here.

Published: 12/06/2017 16:44

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