P A 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 shortfall in salary which arose independently of dismissal, particularly where the conditions for payment and the employer’s contractual liability have not been established.

Where a compensatory award has already been paid, tax grossing-up must reflect the tax year in which the payment was received. A later reconsideration does not justify recalculating the whole award under later tax rates. Any subsequent balance due is instead grossed-up by reference to the year of its payment.

The Claimant succeeded before the Employment Tribunal on liability for unfair dismissal after making protected disclosures. There was no appeal against that liability decision.

At remedy, the Tribunal awarded uncapped compensation and grossed it up for tax. It included £14,850 for alleged salary arrears. Two reconsideration judgments first removed, and then restored, that sum and recalculated grossing-up. The employer appealed the remedy and second reconsideration judgments; the Claimant cross-appealed the first reconsideration judgment.

The central issues were whether the alleged pre-dismissal salary shortfall was compensable for unfair dismissal and how tax grossing-up should be calculated where the original award had already been paid.

1. Appeal allowed to the stated extent. The Employment Appeal Tribunal quashed both reconsideration judgments, reinstated the original remedy judgment, and ordered a further net payment of £12,883.92, to be grossed up.
2. Section 123 of the Employment Rights Act 1996 permits compensation only for loss sustained in consequence of dismissal. The alleged £14,850 salary shortfall arose, if at all, independently of the dismissal. Its recovery depended on establishing an agreed salary increase, the terms governing deferred payment, and a failure to pay when payment fell due. The dismissal did not itself make the sum payable.
3. There had been no liability findings on those matters. The Tribunal was therefore not entitled to award a remedy for that alleged loss. Its second reconsideration judgment was wrong to reinstate the £14,850 award.
4. Under Part 6, Chapter 3 of the Income Tax (Earnings and Pensions) Act 2003, the relevant tax year is the year in which the termination payment is received. Since the principal payment had been received in 2013/2014, grossing-up of that payment had to use that year’s tax bands. The Tribunal erred by recalculating the whole award using later tax years.
5. The original grossing-up also required a blended calculation using the applicable 20%, 40% and 45% tax bands, rather than a flat 40% rate. Any smaller differential arising from reconsideration is grossed up in the tax year in which it is paid. The parties were directed to agree, or make written representations about, the grossed amount needed to provide the further net sum.

• Employment Appeal Tribunal: allowed the employer’s appeal to the stated extent, quashed the two reconsideration judgments, reinstated the original remedy judgment, and made a further net award subject to grossing-up.
• Employment Tribunal: found the Claimant unfairly dismissed in a liability judgment sent on 4 June 2013. Its remedy judgment was promulgated on 17 March 2014, followed by reconsideration judgments promulgated on 13 May 2015 and 11 September 2015.