PA Finlay & Co Ltd v Finlay

Compensation for unfair dismissal under section 123 of the Employment Rights Act 1996 covers loss sustained in consequence of the dismissal. It does not include an asserted pre-dismissal salary shortfall which arose independently of dismissal, particularly where liability and the conditions for payment have not been established.

For termination payments taxable under the Income Tax (Earnings and Pensions) Act 2003, grossing-up must use the tax year in which the payment was received. A later reconsideration does not justify recalculating an award already paid by reference to later tax rates. Any additional sum paid following reconsideration must instead be grossed-up by reference to the tax year of that payment.

The Claimant succeeded before the Employment Tribunal in an unfair dismissal claim arising from protected disclosures. Liability was not appealed. Three related appeals concerned the remedy judgment and two reconsideration judgments.

The Tribunal had included £14,850 for alleged arrears of salary within the compensatory award, removed it on first reconsideration, and restored it on second reconsideration. It also repeatedly recalculated the gross-up for tax despite the original award having been paid and taxed in 2013/14.

The central issues were whether alleged unpaid salary from before dismissal was compensable under section 123 of the Employment Rights Act 1996, and which tax year governed grossing-up of the paid award.

1. Appeal allowed to the extent indicated. Both reconsideration judgments were quashed. The original remedy judgment was reinstated, subject to a further net award of £12,883.92 to be grossed-up and paid.
2. Under section 123 of the Employment Rights Act 1996, compensation must reflect loss sustained in consequence of dismissal and attributable to the employer’s action. The asserted £14,850 salary shortfall did not meet that description. It arose, if at all, independently of dismissal. The Claimant would have needed to establish an agreed salary increase, the terms on which payment became due, and a failure to pay. No liability findings had resolved those matters. On the Claimant’s own case, payment was conditional on the company being able to afford it. Dismissal did not itself make the sum due. The Tribunal therefore erred in restoring that item.
3. A termination payment was taxable under Part 6, Chapter 3 of the Income Tax (Earnings and Pensions) Act 2003. By section 403(2), the relevant tax year was the year in which the payment was received. As the original award had been paid and taxed in 2013/14, grossing-up of that award had to use the 2013/14 bands and rates, rather than rates from later years in which reconsideration judgments were made.
4. The original grossing-up calculation had itself used an over-simplified 40% rate. The correct blended calculation produced a gross award of £252,574.55 for a net award of £166,318. The remaining net shortfall was £12,883.92. That additional payment was to be grossed-up in the current tax year, without a further £30,000 tax-free element, and the parties were directed to agree the grossed-up figure or make written submissions.

• Employment Appeal Tribunal: allowed the employer’s appeals to the stated extent, quashed both reconsideration judgments, reinstated the original remedy judgment, and directed payment of a further grossed-up sum.
• Employment Tribunal: found the Claimant unfairly dismissed. Its remedy judgment of 17 March 2014 was followed by reconsideration judgments dated 13 May 2015 and 11 September 2015.