Steen & Co. Employment Solicitors
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How Tribunals Calculate Compensation

Where an employee is found to have been unfairly dismissed the Employment Tribunal will consider whether to make any of the following awards (and in the following order): reinstatement, re-engagement and compensation. Reinstatement means ‘your job back’, re-engagement means ‘a job with the Company’ and compensation means ‘money’. As both reinstatement and re-engagement orders are incredibly rare given the usual order is compensation.

Most unfair dismissal claims are subject to a maximum amount of compensation. A few rare types of unfair dismissal claim are not limited. An example of one of these rare types is unfair dismissal by reason of whistle blowing. This means that some people try and bring their unfair dismissal claim as a whistle blowing claim simply to get round the tribunal limit. Tribunals are ‘alive’ to this tactic and therefore look critically at such claims.

This article explains how Employment Tribunals work out what to award ex employees who have won their unfair dismissal claim. There are two awards - the basic award and the compensatory award. The basic award is a fixed amount calculated in the same way as a statutory redundancy payment. This award is based on gross weekly wage but is subject to a maximum of £475 per week (in 2015). If the employee has already had a redundancy payment they don't get a basic award as well.

Before dealing with compensation however we must explain, by using the standard Steen & Co Employment Solicitor’s explanation, whether someone will be awarded compensation in tribunal. We say that the following three tests need to be met if compensation is to be awarded:

a) You have to win your unfair dismissal case.
b) The unfairness that resulted in your winning must have ‘made a difference’ – in other words if your dismissal was only technically unfair and for example you would have been dismissed anyway had the unfairness not happened then it can be said that the unfairness would not have made a difference to your losses. This is explained more fully later in this article but a standard explanation we give is to say that if you are caught at midnight burning the factory down and sacked on the spot you may have been unfairly dismissed but ‘you ain’t getting any compensation’.
c) You must suffer loss. This obvious point is worth making nonetheless. We say that if you get a higher paid or equivalent job before you have suffered loss (for example within the period of time you have been paid for by getting a payment in lieu of notice) then no amount of unfairness is going to result in compensation. In this sense compensation for unfair dismissal isn’t designed to punish the ex employer for its actions but rather it is to compensate the employee for losses occasioned by the dismissal. Therefore, even the most unfair dismissal in the world won’t result in compensation if you get a higher paid job in the morning!

Only if all three tests above are met does the question of compensation arise. An additional factor to take into account is legal costs – if you are going to use a lawyer to represent you then you have to factor in the costs. Legal costs are not recoverable in nearly all cases. A good employment law solicitor should be able to calculate what your claim is quite quickly and in doing so be able to compare it to whatever offer has been made.

This article mainly covers the compensatory award as this is the main component of unfair dismissal awards. The compensatory award is calculated in a number of stages but overall is that sum which the Employment Tribunal considers 'just and equitable'. The key elements are whether the loss claimed to have been suffered was ‘as a consequence of the unfair dismissal”, “attributable to the employer” and whether it would be "just and equitable" to make such an award.

Unfair dismissal compensation is set to a maximum of £78,355 (from 2015) or a year’s pay whichever is the smaller. The change to apply a cap of a year’s pay came into force in the summer of 2013. There are a limited number of exceptions where the maximum limit does not apply. Compensation is based on a calculation worked out in 4 ways but is overall that sum which the Tribunal considers just and equitable. In working out what to pay the Tribunal start with a calculation of actual losses. This takes into account pay and benefits and what you actually lost from the time of dismissal to the date the assessment is made.

A year’s pay needs further clarification. For dismissals from 29 July 2013, a new limit on the unfair dismissal compensatory award applied. It is now the lower of £78,355 (the current limit in 2015) or 52 times the ex-employee's "week's pay". A "week's pay" is calculated rigidly under provisions in the Employment Rights Act 1996. It is either remuneration payable under the contract for working normal hours in a week or, where the remuneration varies with the amount of work done, the average remuneration payable "under the contract of employment" over the 12 weeks prior to dismissal. There are a few issues with this. One is that "remuneration" does not normally include benefits in kind such as pension, car, health cover and so on. Secondly, if bonuses are discretionary, they may not be considered to be payable "under the contract of employment" and so may be excluded from the definition of a week’s pay. In addition, although the statutory definition of "week's pay" does allow annual contractual bonuses to be apportioned in a "just" manner in respect of the 12-week period it may well not be possible to quantify the bonus that would be payable for the period. Case law has required that, in order to be included, the pay needs to be capable of being computed at the relevant date.

In this context, we might consider that the words ‘just and equitable’ mean 'what the Tribunal considers fair'. As we said there are a limited number of exceptions where the maximum limit does not apply and so in those cases the award could be much larger.

The first stage in the calculation of the compensatory award is to work out 'actual losses'. This takes into account pay and benefits and what the employee actually lost from the time of dismissal to the date the assessment is made. Any money that the employee actually received as a result of dismissal such as notice and holiday pay should be taken into account in calculating actual losses. This calculation is therefore just 'maths'. The Claimant should work out the net value of pay and benefits per week when employed. That figure should be multiplied by the number of weeks between dismissal and the Tribunal. The 'actual loss' figure is calculated by taking away any payment paid on termination from the resulting figure. An employer facing an unfair dismissal claim should also do this calculation and ensure that evidence to show that its calculations are correct is put into the Tribunal bundle.

The second calculation by the Employment Tribunal is an estimate of future losses. This would take into account what the employee has done to find a job and whether the employee has actually found a job. This will be based on the evidence shown by the employee and perhaps the Tribunal’s knowledge and common sense. The Tribunal will form a view of the chances of the employee obtaining employment in the future or if he or she has already found alternative employment, it will work out the difference in wages between the old and the new job and estimate how long the losses will continue. It won’t look too far into the future as this would just be speculation. A rough rule of thumb is that it won’t award future losses of more than 12 or 18 months and much less if the employee could reasonably have been expected to find another job quicker. Future losses for a much longer period might however be awarded in a case where it is reasonable to assume that the person might not work again – for example a person just a few years off retirement. A good tip for companies facing unfair dismissal claims it thinks it might lose is to keep a record of all jobs that the employee could apply for after his or her dismissal. This might be as simple as cutting out the relevant adverts from the local job paper. This information could then be used to challenge the employee’s claim that he or she has not been able to find a new job.

Likewise if we are acting for an employee we will advise them to keep a record of all things they do to look for another job such as registering with agencies, speaking to contacts, reading the jobs section in the paper etc.
In considering compensation for loss of future earnings, will have to use ‘informed speculation’ (see, for example, the Decision in Wardle v Credit Agricole [2011] IRLR 604). That case is also authority for the rule that loss of future of earnings should generally be addressed only up to the point where there is a more than 50% chance that the employee would have gained a job at an equivalent salary level. This wording comes from the case of Daly v Northumberland Tyne & Wear NHS Foundation Trust UKEAT/0306/14/LA which contains useful guidance on how tribunals should deal with future loss. That case also refers to another case which said “to a considerable extent an exercise in speculation based on its assessment of the Claimant, his attitude and abilities and the local job market” This means that an employee should prepare a written statement saying what he or she did about getting a job and explaining such things as the lack of jobs available in the local area for someone of his or her experience and training. For example, that person might be able to say ‘only 3 jobs have been advertised in the local paper in the last X months and I have applied for all of them and nothing has come up via the job centre’.

The third part of overall compensation is to include expenses incurred in seeking alternative employment such as stamps, CV printing and such like. Generally, this claim is small – an award of £40 was awarded in a case we did some time ago with the Tribunal commenting “we think that £40 is a reasonable sum to claim”. If you have evidence of spending more, such as on travel, babysitting costs etc then claim it. In some cases it can also be reasonable to claim for training costs or even relocation costs.
The fourth claim is an award for the loss of the statutory right not to be unfairly dismissed. This sounds a bit odd but reflects the fact that to be able to bring a claim for unfair dismissal the employee has had to have two years’ service. Having been dismissed he or she has lost that continuity of service and has to start again at zero in a new job. On this basis the Tribunals consider that the loss must be worth something and make an award under this head. We have been practising employment law since the 1980s and have noted that ‘for years’ this amount was £250. In 2010 one of our Client’s was award £350 under this head and in preparation for this article we have researched this small point. The law comes from three cases. The first in 1972 which determined that this was an appropriate award to make and decided it should be £20. The second was in 1986 which updated £20 for inflation and said it should be £100. The third was in 2007 which said again that the award should be based on the £100 awarded in 1986 but updated for inflation. Updating that figure to 2010 got to about £228.53 so now we think £350 - £400 is about right.

Tribunals will normally order an employee bringing an Employment Tribunal claim, who is called the Claimant, to produce a statement of loss and send it to the company along with evidence supporting this loss. This statement of loss should take into account the four steps mentioned above. The Company should read this well before the hearing and at least check the calculations and perhaps challenge anything it doesn’t agree with.
The Employment Tribunal, having consider the steps above, will then look at whether there is contributory fault and whether an individual’s conduct means that a reduction should be applied and whether any procedural failing lead to the unfair dismissal finding. Thus, if the dismissal was only ‘technically unfair’ the Employment Tribunal would consider whether had the procedural failing not happened the employee could have been fairly dismissed at that time or within a short time thereafter. If the Tribunal decide that the employee would have been dismissed fairly anyway within a short period of time it will award compensation based on that short period of time.

This procedural reduction point means that there is no need for an ‘all or nothing’ decision. If the Employment Tribunal thinks there is a doubt whether or not the employee would have been dismissed fairly, the doubt can be reflected by reducing the normal amount of compensation by a percentage representing the chance that the employee would still have lost his employment fairly. So for example, the Employment Tribunal might decide that had an appeal been given there would have been a 25% chance of the employee retaining his or her job and thus award 25% of the compensation it has worked out in accordance with the four steps above.
In all three cases, the Tribunal could make a percentage reduction from the total figure. So, for example, it could find that the employee is 50% to blame for his or her own dismissal. Thus, this means that the compensation and possibly the basic award would be reduced by 50%. At that point, the Tribunal would reduce the resulting figure to the maximum if appropriate.

The Employment Tribunal will also consider whether the employee has taken reasonable steps to reduce his or her loss. This is called mitigation. It is an absolute duty on all employees to act in such a way as to reduce their losses. In the absence of such steps, it is open to the Tribunal to reduce the compensation payable to an amount that it feels the employee would have suffered had he or she mitigated his or her losses. In other words ‘although you have been unemployed for 6 months we think that had you bothered to look for work you would have found a job within a month; so that is all that we will give you’. This is where the Company evidence of available jobs we mentioned above will come in useful.
Another reduction the Tribunal will do is consider whether the employee would have been dismissed fairly anyway. Thus, for example, if there is evidence that suggests that regardless of any procedure followed the employee would have been dismissed anyway, the Employment Tribunal would take this into account. Technically this reduction is known as a Polkey reduction after the case that decided that it was appropriate: Polkey -v- A E Dayton Services Limited; HL 1987- it is worth looking this case up.

In one case this firm dealt with a branch manager of a recruitment business was dismissed by reason of redundancy. As there was no procedure followed in dismissing her, the dismissal was clearly unfair and we told the Tribunal this at the outset of the case. That ensured that the tribunal concentrated on the important issue: namely that even though unfairly dismissed the Claimant didn't deserve much money. As such, on behalf of the recruitment business we explained to the Tribunal just how important it was to dismiss the employee at that time. We showed the Tribunal graphs of branch turnover, expected turnover, break even turnover and expected profit. The Tribunal found that the commercial reasons for dismissing at that time were so strong that it only awarded the employee a week's pay as compensation. This week reflected the Tribunal's view on the length of time it would have taken to dismiss the employee fairly had a fair procedure been followed.
There is one exception that applies to calculation of loss where the employee has obtained a new job in what would have been the notice period. In cases of actual dismissal, but not constructive dismissal, a case called Norton Tool v Tewson in 1972 provides a rule that where an employee is not given notice but should have been he or she can claim the notice money back even if he or she has got another job during the period of what would have been the notice period. The reason for this rule is that if it didn't apply it encourage employers not to pay notice on termination as they could end up paying less if the employee then got a job during the notice period. Another way of looking at this rule is to realise that the rule encourages the good employment practice of actually paying notice money when it was due. Without the rule bad behaviour could be rewarded and good behaviour punished. You should also consider an item in our news section about 'the Norton tool principle' in cases of constructive dismissal.

The question of receipt of state benefits much be taken into account. If the dismissed employee has received any state benefits, following an unfair dismissal, special regulations come into force. What happens is that having made an award the Tribunal must state what part of it relates to loss of previous earnings and for what period. It then has to provide a special notice to that part of the Government paying benefits. The Government will then order that the employer pays part of the award to it rather than to the Claimant. This prevents the Claimant benefiting from being awarded compensation for a period during which they had received benefits. Incidentally these ‘recoupment’ provisions do not apply to a private negotiated settlement. This means that it can be in both the employer and employee’s interest to settle in some cases.
Thus in summary unfair dismissal compensation is usually subject to a maximum amount, takes into account actual and estimated future losses and comes with a strong requirement for the Tribunal to consider whether the employee would have been dismissed anyway and whether the employee was at fault. This firm is happy to provide advice on all aspects of unfair dismissal including representation at tribunal. If this may be too expensive we are also happy to remain in the background and just provide advice.

Please contact us using the 'contact form' on this website. We can't provide free advice, however, as this is not fair to our existing paying clients.