In their spare time, employers and individuals should want to look and digest two rulings. I am not going to go into full details, save to say that this impacts the payroll profession and departments:
Johnson and Others versus the Secretary of State for Work and Pensions
This was a Divisional Court hearing between 27 and 28 November 2018 with a judgement given on 11 January 2019.
4 individuals had their separate cases amalgamated, as they were largely similar. This can be very much simplified by saying that this centered on ‘earned income’, as reported by the employer via the Full Payment Submission (FPS). All cases were similar in that the monthly-paid employees were only paid once in a month, however, the Department of Work and Pension’s (DWP) Universal Credit (UC) system recorded two months’ earnings in one UC Assessment Period.
The result was that the UC payment was adjusted to reflect the earnings in the Assessment Period. However, the employer was recording the payment date on the FPS as the pay day, rather than the date that the individual was contractually-entitled to be paid. This mattered, as each Assessment Period straddled a month end, contractual paydays were due at the month end, though non-payment days (such as a weekend) meant that the actual payday was brought forward.
The ruling said that the DWP had:
‘Wrongly assumed that where salaries for two different months were received during the same assessment period, the combined salaries from the two months were to be treated as earned income in respect of that assessment period’
Essentially, in finding in favour of the claimants (and against the DWP), the conclusion was that DWP needed to make an adjustment.
Thérèse Coffey, the Secretary of State for Work and Pensions (SSWP) appealed this judgement to the Court of Appeal, taking place on 19 and 20 May 2020.
Secretary of State for Work and Pensions Johnson versus Others
The Court of Appeal hearing was handed down on 22 June 2020.
The session referred to the overriding issue as one caused by a ‘non-banking day salary shift’, i.e. the employee is paid on a day other than the day that they are contractually entitled to be paid because that day is a non-banking day. This causes in many cases, two months earnings to be used to assess UC entitlement in one Assessment Period.
Essentially, appealed the SSWP, the way that the initial ruling has been handed down meant the whole Universal Credit system would be ‘confused’ and not as per the legislation’s intention – the Universal Credit Regulations 2013. The application of the Universal Credit system was an automated one (RTI data feeding to DWP) and, if the initial ruling about manual adjustments were to be applied, this would not achieve Parliament’s intention on passing the legislation. Effectively, the SSWP was saying that it was too difficult to do and legislation would have to change.
The ruling contained harsh words in finding against the SSWP. Simply, it is ‘irrational’ that the SSWP did not consider or put in place a system to the specific issue of a ‘non-banking day salary shift’. In fact, the decision to do nothing is so irrational that ‘no reasonable SSWP’ would have refused to find a solution.
So, although the higher court found against the SSWP on a different basis than the lower court in 2019, the ruling requires her to find a way to ‘solve the problem’. Whether Thérèse Coffey applies for permission to appeal this ruling to the Supreme Court is, perhaps, another day in court.
What Can Employers do?
There are fundamental problems to the UC system – that is obvious. The RTI feed to the DWP is rigid in its application and it is a matter of fact that employees are not always paid on the contractual payday because of this ‘non-banking day salary shift’.
However, there are two things that the employer can do to help individuals. This is because the rigid UC system is reliant on the data that we pass HMRC via the Full Payment Submission (FPS). At the same time, they are things that we should be doing anyway:
Only Submit the FPS When You Have Paid Employees
I am hearing horror stories of employers that have run the payroll, submitted the FPS but have not actually paid people. There may be perfectly valid reasons why the employer has not actually paid people, which I will not go into.
However, submission of the FPS to HMRC implies that staff have actually been paid. If the person is claiming UC, the date received by the DWP will also imply that they have received monies in their Assessment Period. If the individual is relying on UC as an income top-up, the employer is doing their employees no favours at all.
Please, only submit the FPS to HMRC when you have actually paid. There is a legal obligation to submit the FPS on or before the date that the employee is paid.
Of course, not paying employees on the contractual payday has all sorts of employment law issues. Technically, the employer is in breach of contract and the employee has suffered an unlawful deduction. A court of law will probably find in the employee’s favour.
Use the Correct Payment Date in the FPS
I have been banging on about this for years and still employers (and HMRC) get this wrong. It is really quite simple and requires employers to separate two things in their minds:
- The payday – which is the date that the employee is actually paid
- The payment date – the date that the employee is contractually entitled to be paid
This is where the ‘non-banking day salary shift’ referred to above comes into play.
For example, it may be that an employee on a monthly payroll is contractually entitled to be paid on the 30th of the month. That should be the date that is declared within the FPS as the payment date. However, in August 2020, the employer will probably bring forward the date that the employee is actually paid because 30 August 2020 falls on a Sunday. There is a non-banking day shift and employers will probably pay their employees on Friday 28 August 2020. Therefore, we have two different dates to consider:
- The payday – which is the 28th of August 2020, the date by which the FPS must be sent to HMRC
- The payment date – the date that the employee was contractually entitled to be paid (i.e. the 30th). This date is declared on the FPS, regulates / stabilises the UC Assessment Period and is the date that HMRC use to determine whether or not the FPS was filed late
I wonder if the employers in the Johnson and Others case had recognised the difference between payday and payment date. If they had, I also wonder if the implications these individuals suffered would have gone away.
Employers can only do so much – i.e. only file the FPS when they have actually paid and getting the payment date right. This will not correct every situation caused by the inflexible Universal Credit system.
Guidance for Employers
Employers are best-placed to look at the RTI Data Items Grid for the definition of the field payment date. This says that for payment date on the FPS:
Enter the payment date for your employee. If the payment date falls on a ‘non-banking day’ show the payment as having been made on the regular payday. See https://www.gov.uk/runningpayroll/fps-after-payday
Even the link to Gov.UK guidance says that it is the ‘regular’ payment date that should be entered if the contractual payday falls on a non-banking day.
Contrast this with the August 2019 Employer Bulletin which says the following on page 2:
Accurate and timely reporting of payroll is really important. This is because it helps to make sure that your employee pays the right amount of tax. The information is also linked to Universal Credit which is designed to increase the financial benefits of work and provide employers with a more flexible workforce…
The payment date you report on your Full Payment Submission must be on or before the date you pay your employees, not the payroll run date, or another date from your payroll system. Incorrect recording of this date is one of the most common reasons for the issue of a late filing penalty.
This is not correct and should be ignored