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Universal credit: Is a payment made in settlement of industrial tribunal proceedings ‘employed earnings’ for the purpose of Universal Credit?

16th December, 2021

Department for Communities v. RM (UC) [2021] NI Com 36

Background

The claimant and his wife made a joint claim for UC in August 2018. In December 2018, the Department decided that his entitlement to UC was zero because his earnings for that assessment period exceeded his entitlement to UC. The Department based its decision on the claimant’s receipt of £5,228.42 in the assessment period from November to December 2018.

The payment of £5,228.42 to the claimant was made in settlement of industrial tribunal proceedings. It related to a previous period of employment from 2005 to 2012, when the claimant claimed his salary did not reflect the hours he worked and did not include pro rata holiday pay entitlement. The claimant received the payment following settlement of conciliation proceedings involving the Labour Relations Agency. It was described as a ‘gesture of goodwill’ rather than a liability under a contractual obligation.

The claimant appealed the Department’s decision to award him zero UC for the assessment period November to December 2018. The appeal tribunal allowed his appeal. The Department appealed to the Social Security Commissioner. Law Centre NI represented the claimant.

Legal issue

The Department’s appeal focused on whether the settlement payment to the claimant should be considered earned income for the purpose of UC.

Article 13 of the Welfare Reform (NI) Order 2015 sets out how the amount of Universal Credit awarded to a claimant is calculated. Article 13(3)(a) provides that from the maximum amount awarded to the claimant, an amount in respect of earned income should be deducted.

Regulation 51 of the Universal Credit (NI) 2016 Regulations defines ‘earned income’ as:

51 ‘Earned income’ means-
(a) the remuneration or profits derived from-
(i) employment under a contract of service or in an office, including elective office,
(ii) a trade, profession or vocation, or
(iii) any other paid work; or
(b) any income treated as earned income in accordance with this Chapter.’

    Regulation 53(1) provides the general principle for the calculation of ‘earned income’:

    53 – (1) The calculation of a person’s earned income in respect of an assessment period is, unless otherwise provided in this Chapter, to be based on the actual amounts received in that period.’

    Regulation 55 provides that the mechanism for calculating earned income is by reference to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

    Sections 62(1) and (2) ITEPA provide:

    62(1) This section explains what is meant by ‘earnings’ in the employment income Parts.
    (2) In those Parts ‘earnings’, in relation to an employment, means-
    (a) any salary, wages or fee,
    (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or
    (c) anything else that constitutes an emolument of the employment.’

    Regulation 62(1) of the UC Regulations provides an obligation on employees to provide information to the Department for the purpose of calculating their earned income. Regulation 62(2) provides that if the claimant’s employer is a Real Time Information employer, the amount of a person’s employed earnings is based on information reported by their employer to HMRC. Regulation 62(3)(b)(ii) provides for an exception to Regulation 62(2). It states:

    (3) The Department may determine that paragraph (2) does not apply in respect of-
    (a)…
    (b) a particular assessment period where-
    (i)…
    (ii) where the Department considers that the information received from HMRC is incorrect or fails to reflect the definition of employed earnings in regulation 55, in some material respect.’

    At the claimant’s appeal hearing, the LQM decided that the information from HMRC in respect of the settlement payment to the claimant failed to reflect the definition of earnings in regulation 55 in some material respect. It therefore fell within the exception in regulation 62(3)(b)(ii).

    The Department disputed this. The Department argued that the tribunal wrongly treated the settlement payment to the claimant as capital rather than income. It referred to the cases of Minter v. Kingston Upon Hull City Council and Potter v. Secretary of State for Work and Pensions [2011] EWCA Civ 1155 which concerned legacy benefits, namely Housing Benefit and Jobseeker’s Allowance respectively. In Minter and Potter, the Court of Appeal in England and Wales held that if a sum is paid in settlement of claims it does not matter in determining its true characteristic whether it is a lump sum or a series of periodic payments. It is only necessary to examine why the compensation is paid.

    The Department argued that in the claimant’s case, it is the ‘true characteristics’ of the payment, rather than the label attached to it, which determine whether the payment is one of earnings or otherwise. The Department argued that the true characteristic of the payment to the claimant was for work carried out for a specified number of hours at a set rate of pay, and that regulation 62(2) UC Regulations required it to be attributed to the claimant’s UC award as earned income.

    On the claimant’s behalf, Law Centre NI argued that the tribunal correctly exercised its discretion under regulation 62(3)(b)(ii) to determine that regulation 62(2) did not apply. Law Centre NI pointed out that if the tribunal considered the payment ‘earned income’, it would relate to employment stretching back over 15 years. Law Centre NI argued that settlements in employment disputes should not be seen as ‘earned income’ given all the various elements included in such payments, including injury to feelings, interest etc. Law Centre NI argued that the claimant’s case was different to that in Minter and Potter and those decisions should not be followed in his case.

    Decision

    The Commissioner did not agree with the Department that the tribunal erred in law by failing to apply Minter and Potter in the claimant’s case. Agreeing with Law Centre NI, the Commissioner decided that the legislation at issue in Minter and Potter was different and included provisions that required any earnings, to the extent that they were not a payment of income, to be treated as income. Moreover, Minter and Potter did not relate to a present assessment period, but as a payment of earnings for a specific past period and as income for a prospective future period, respectively. The Commissioner considered that the logic of the Department’s argument would lead to the payment to the claimant being attributable to a past period and a present period. The Commissioner could not accept this.

    The Commissioner identified a fundamental difference between UC and legacy benefits. Unlike the position for legacy benefits, relevant terms in UC legislation are now defined with direct reference to the provisions of income tax legislation. The consequence of that, the Commissioner decided, was that the question of whether a payment amounts to earned income is not to be addressed on the basis of its ‘true characteristics’, as per Minter and Potter, but rather whether it falls within the definition provided in the legislation.

    In this case, regulation 55 UC Regulations is of direct relevance. The Commissioner regarded it as serving as a gateway between social security law and income tax law, which defined concepts within the former in terms of the latter.

    According to the Commissioner, the direct link between the definition of employed earnings in the UC regulations and the income tax legislation, distinguishes UC employed earnings cases from legacy benefit cases such as Minter and Potter.

    The Commissioner stated that the decision maker’s focus must be on income tax law and in particular the definition of general earnings under section 7(3) ITEPA. At paragraph 57, he stated:

    ‘The task for the UC decision maker is not to decide whether a payment falls into one or other of the undefined binary categories of income and capital. In order to decide whether a payment constitutes ‘employed earnings’, rather than focus on whether a payment has the true characteristics of income, it appears to be that the sole question instead is simply whether it falls within the definition of general earnings under section 7(3) of the ITEPA.’

    The Commissioner highlighted the complexity of this task, continuing at paragraph 57:

    ‘However, that question is complicated to some extent by the question of whether the income tax law to be applied in the adjudication of UC is precisely the same as applied by HMRC in charging income tax, or whether it is modified to some extent in the UC context.

    The Commissioner considered the Department’s role in informing a tribunal of relevant income tax law in cases involving the definition of income:

    [59] ‘Earned income’ for UC purposes cannot simply be categorised as a payment which is not capital. The proper focus of enquiry in such cases lies within the ITEPA. The submissions provided by the Department to the tribunal did not address the ITEPA in any comprehensive way. However, in cases where the definition of income is in dispute, it seems to me, an onus falls on the Department to provide reasoned submissions addressing the provisions of the ITEPA and any relevant case law. This is a very substantial piece of legislation and is likely to have generated a substantial body of jurisprudence. The Department cannot assume that this will be familiar to tribunal members who have had to be knowledgeable about social security law but not, hitherto, income tax law.’

    Turning to the claimant’s case, the Commissioner identified the central question: whether the tribunal was entitled to find that the settlement payment to the claimant failed to reflect the definition of employed earnings in some respect.

    Referring to case law, including the decision of the Court of Appeal in England and Wales in R(Johnson) v. Secretary of State for Work and Pensions [2020] EWCA Civ 778 and the Upper Tribunal decision in NM v. Secretary of State for Work and Pensions [2021] UKUT 46, the Commissioner acknowledged that the fact that the payment to the claimant can or should be attributed to a period other than the assessment period at issue was not relevant.

    The only question was whether the payment to the claimant met the definition of earnings in section 62(2) of ITEPA. The Commissioner had to decide whether the payment to the claimant fell within sub sections (a), (b) or (c) of section 62(2). The Commissioner was able to discount (b) (any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth) outright. Turning to consider whether (a) or (c) applied, the Commissioner described the payment to the claimant as follows:

    ‘Although the payment made to the [claimant] relates to a claim in the Industrial Tribunal for underpaid past wages or salary, the liability to pay wages for the past period was disputed by the employer. As observed by the tribunal, the settlement payment was referred to as a goodwill gesture. It was made in consideration for the withdrawal of legal proceedings, as opposed to being made directly in consideration for employment services. The employer had denied any contractual liability to [the claimant] under any contract of employment or contract of service. Equally the payment was not an emolument as not directly constituting compensation for employment or holding an office.’

    Referring to the case of Hochstrasser v. Mayes [1959] Ch D 22, which outlines the position under income tax law, the Commissioner stated:

    The settlement payment was in consideration for the proceedings being withdrawn, not in consideration for employment services provided by the [claimant] between 2005 and 2012.’

    Ultimately, rejecting the application of sub sections (a) or (c), the Commissioner concluded:

    …I cannot be satisfied from the submissions made that the payment received by the [claimant] in settlement of industrial tribunal proceedings was a payment of wages or salary, or an emolument of employment under the ITEPA and the related UC Regulations. It appears to be that the tribunal was similarly entitled to exercise its discretion under regulation 62(3)(b)(ii) and to hold that the payment made to the [claimant] in consideration of withdrawing his Industrial Tribunal proceedings failed to reflect the definition of employed earnings in some material respect for the purposes of universal credit (UC).’

    The Commissioner disallowed the Department’s appeal.

    For a full copy of the Judgment: click here