One size fits all? Employed earnings and Universal Credit
Lawrence Barratt looks at 2 recent cases on the effects of pay cycles from employment which didn’t match Universal Credit (UC) assessment periods
This article was originally published in September 2020 and was updated in October 2021.
One of the motivations behind the introduction of Universal Credit (UC) was “encouraging personal responsibility” through a system of monthly payments.¹ The idea was that claimants would, in general, adjust to budgeting on a monthly basis in order to be better prepared for paid work. Because of this, a fundamental feature of UC is the monthly assessment period, during which earnings and other income are taken into account to calculate the award for that month. However, the rigidity of the monthly system has posed problems for employed claimants with particular pay cycles. This article discusses 2 recent cases involving claimants whose pay cycles and the way in which these interacted with UC assessment periods (and in the second case, the benefit cap) has caused considerable difficulties. It also explains what clients in this position can do.
Background
The monthly UC award is calculated by working out a ‘maximum amount’, which may be tapered to reflect income for working claimants.² Claimants with limited capability work or responsibility for children are entitled to a ‘work allowance’³, an amount of earnings they can keep before their UC award is reduced by 63p for every pound in earnings they receive. An assessment period (AP) is 1 month long and usually begins on the same day of each month. Where a person is employed by an employer that uses HMRC’s Real Time Information (RTI) system, their earned income for UC purposes is based on the information reported to HMRC by the employer. This information is shared with DWP for the purposes of calculating UC, so the claimant does not have to report their own earnings.⁴
Regulation 54 of the Universal Credit Regulations 2013 is the key provision for calculating earned income. So far as is relevant, it says:
Calculation of earned income — general principles
54. — (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.
There are 2 phrases which are worth mentioning and will be discussed in detail below. Firstly, earned income is calculated ‘in respect of’ an AP. Secondly, that calculation is ‘to be based on the actual amounts received’ in that AP.
Monthly pay — the Johnson case
R (on the application of Johnson) v SSWP [2020] EWCA Civ 778 was a judicial review brought by four single mothers who argued that the way UC calculated their earned income did not accommodate the fact that their pay dates would fluctuate if their usual payday fell on a weekend or bank holiday. This is referred to as the ‘non-banking day salary shift’.
This meant that they would sometimes receive 2 monthly salary payments in the same assessment period. Their UC award would therefore be greatly reduced in comparison to months where only one salary payment fell within the AP. Then, in the next AP, they would receive far more UC than usual, due to being treated as having no earnings. These fluctuations caused considerable difficulties in budgeting and the claimants incurred various bank fees and went into rent arrears as a result. Moreover, they would lose the benefit of the work allowance for the AP where they appeared to have no income.
Example
One of the claimants had an assessment period running from the 30th to the 29th and was paid by her employer on the last working day of the month. In the November — December assessment period, she received 2 salary payments — one on 30th November and another on 29th December.
Because the claimant was responsible for children, she was entitled to a work allowance. However, she would only receive one work allowance even in assessment periods where she received 2 salary payments. She therefore lost out on the benefit of one month’s work allowance against one month’s salary.
When the case was heard by the High Court in 2019⁵, it held that the Department for Work and Pensions (DWP) had wrongly construed Regulation 54. The court held that the use of the words ‘in respect of an assessment period’ meant that an adjustment had to be made where some of the income received in an AP in fact related to a different AP. In other words, the DWP should investigate which AP the earnings were paid in respect of and adjust the award if appropriate.
The High Court also attached significance to the phrase ‘The calculation of a person’s earned income…is… to be based on the actual amounts received in that period’. The Court found that this was different to saying that the amount of earned income ‘is to be’ the actual amounts received. In other words, the calculation of earned income was ‘to be based on’, but might not be the same as, the actual amounts received.
The DWP promptly appealed this judgment to the Court of Appeal. The reasoning of the High Court had a wide-ranging application. For example, a builder who performs work in January but doesn’t receive payment until April could argue, based on the High Court decision, that the DWP must look beyond the fact that the salary was paid in April and instead look back at which period the earnings were paid ‘in respect of’.
The DWP argued that this construction of Regulation 54 threw the whole operation of the UC system into confusion, because the calculation of awards relies on automation. The award must, it argued, be based on the actual amount of income received in the AP, without any further consideration of whether it related to another period. The claimants sought to uphold the High Court’s construction. Alternatively, they argued that if the DWP was correct in its interpretation of regulation 54, this was arbitrary and irrational. A discrimination argument made under Article 14 read with Article 1 of Protocol 1 of the European Convention on Human Rights (‘ECHR’) was also made.
Giving the leading judgment in the Court of Appeal, Rose LJ accepted the DWP’s argument that the High Court was wrong to interpret regulation 54 as requiring that an adjustment had to be made where the earnings received in an AP did not ‘reflect’ the amount payable in respect of that period:
I have concluded with some reluctance that the Divisional Court did fall into error in construing regulation 54. I consider that the provision cannot bear the meaning they gave to it without substantially undermining the scheme as Parliament intended it to operate.
During the course of argument many different commonly-occurring instances were discussed where people receive money for work which they have performed in a different assessment period from the period in which the money is received. A person may receive a commission or bonus payment rewarding them for achieving a sales target as a result of work performed over the previous six months; a tradesman may take on a job and receive an upfront payment before starting the job, then work for a number of months and receive a lump-sum payment at the end of the job, or in weekly instalments following the end of the job. In each case the actual receipt could be said not to be earned income in respect of the assessment period in which it is received but in respect of a number of assessment periods including that one or in respect of one or more entirely different assessment periods.
Rose LJ accepted that regulation 54 is designed to avoid the need for detailed examination of the relationship between when work was done and when payment was received. That is essential, because the system of UC is intended to be automated and this purpose had to be taken into account when constructing the wording.
Therefore, the Court of Appeal held that the correct construction of regulation 54, therefore, is that ‘in respect of’ means simply ‘for’ or ‘in’ an AP. This means that earnings are income for UC in the AP in which they are received — it is not possible to argue that there should be apportionment of earnings over prior assessment periods if the money was not actually ‘earned’ during that particular AP.
The Court of Appeal also rejected the High Court’s view on the significance of ‘to be based on’. This phrase is used elsewhere in the Welfare Reform Act 2012 and the UC Regulations, in contexts where they do not mean that some kind of allocation is required.⁶
However the Respondents succeeded in their alternative argument of irrationality. The Court declared that the failure of the DWP to implement a solution to the challenges faced by UC claimants affected by the non-banking day salary shift was so irrational as to be unlawful:
I therefore agree with the [claimants’] description of the oscillations in their universal credit award in response to the non-banking day salary shifts as perverse. Those oscillations are extreme. They lead to significant variations not only in the benefit award but in the combined income for the household from benefits and salary in a particular assessment period. They cause considerable hardship and they create perverse incentives affecting a claimant’s employment choices, cutting across the policy of the overall scheme.
The loss of the work allowance was not justified and was ‘the most egregious aspect of the way the system works’.
The DWP has said that it will not appeal the decision. The Court left it to the DWP to implement a solution to the problem. The discrimination aspect of the Respondents’ case was not dealt with in depth, because the irrationality claim succeeded.
4-weekly pay and the benefit cap — the Pantellerisco case
What about UC claimants who are not affected by the non-banking day salary shift, but whose pay dates on the lunar cycle (4-weekly) cause similar issues? A year has 13 4-week periods in it, but only 12 monthly assessment periods. This means that everyone who is paid on a 4-weekly cycle will have 11 assessment periods in which they receive 1/13 of their annual salary and 1 assessment period in which they receive 2/13 of their salary.
In Pantellerisco⁷ the claimant was paid 4-weekly and also affected by the benefit cap for 11 months of the year, since her wages were for 4 weeks’ work. The benefit cap is not applied where the claimant has earnings of at least the national minimum wage multiplied by 16 hours per week in an AP, converted to a monthly figure. At the time, the minimum wage was £8.21 per hour. The threshold for the claimant was therefore (£8.21 x 16) x 52 / 12 = £569.23 per month. However, her earnings were paid 4-weekly, not monthly. She received only £525.44 (£8.21 x 16) x 4) for 11 months of the year. This meant that the benefit cap was applied to her UC award for those months. The claimant struggled to make ends meet and needed to rely on foodbanks.
Example
In the July-August 2019 assessment period, the claimant would have received £1,862.10 in UC if her earnings had been taken as 1/12 of her annual income. However, the benefit cap was applied and she received only £1,398.87. This was because her earnings were treated as what she earned for 28 days, leaving her below the threshold at which the benefit cap is not applied.
As with the claimants in Johnson, she argued that the earned income calculation was irrational and unlawful, at least for the purposes of establishing an exception to the benefit cap. She also argued that the DWP’s approach was discriminatory. The DWP argued that the calculation of the earnings cap was designed to facilitate automation in conjunction with the RTI feed.
The High Court agreed with the claimant. Garnham J held that the earned income calculation was irrational because no reasonable Secretary of State would have struck the balance in this way. The Court noted that this led to perverse incentives.
However, the Government was granted leave to appeal and on 8 October 2021, the Court of Appeal handed down its judgment, reversing the High Court’s decision and finding that the combined effect of the earnings calculation and the benefit cap earnings exemption threshold was not irrational.
The Court of Appeal noted that the principle of assessing income received during each calendar month was fundamental to the UC system. Although that system can lead to certain groups being disadvantaged, that did not mean that the legislation itself was irrational. The Court distinguished between this issue and the one that arose in Johnson, where there was a straightforward solution that it would have been irrational not to pursue. Here, there was no such straightforward solution. Essentially, it was an issue for the DWP to decide, not the courts.
What should claimants do?
From 16 November 2020, new regulations substitute Reg 61 of the Universal Credit Regulations 2013. These allow the DWP to treat a payment of employed earnings as received in a different assessment period, in order to maintain a regular payment pattern. For assessment periods beginning on or after 16 November 2020, claimants should ask DWP to use this power if they notice on their UC payment statement that 2 monthly payments have been received in the same assessment period. This only applies for those who are paid monthly, so Pantellerisco-type cases are not assisted. The change is not retrospective.
For assessment periods beginning before 16 November 2020 in which 2 monthly wage payments have been received, CPAG suggest that clients affected by the non-banking day issue should still request a mandatory reconsideration and appeal, citing Johnson irrationality and specifically raising Article 14 non-discrimination. The argument is that the loss of the work allowance and lower UC award is a violation of Article 14 of the ECHR when read with Article 1 of the First Protocol, which provides for the peaceful enjoyment of property (including benefits). In argument before the Court of Appeal, the DWP did recognise that being a woman and being a parent were each a relevant status, but denied that there was any discrimination against people with those characteristics, since it could not be said that more women than men or more parents than non-parents were likely to find themselves affected by the non-banking day salary shift. Neither the Court of Appeal nor the High Court made detailed findings on the discrimination arguments in either Johnson or Pantellerisco so the issue is still untested. A mandatory reconsideration template suggests that clients from other groups also make discrimination arguments — such as those with limited capability for work, or simply workers whose monthly AP falls on or around their monthly pay date.
If the First-tier Tribunal (FTT) finds that a provision in secondary legislation (such as the Universal Credit Regulations 2013) discriminates contrary to the Human Rights Act 1998, it must interpret it so as to be compatible or disapply the provision. This follows the Supreme Court decision in RR v SSWP.⁸ The Court of Appeal in Johnson was clear that the High Court’s interpretation of regulation 54 was wrong. How might a future court reinterpret it to be compatible, if it found there had been unlawful discrimination? Unfortunately the answer is unclear.
Clients who are paid 4-weekly should be aware that the Upper Tribunal recently dismissed an appeal from a claimant who had two lots of 4-weekly wages taken into account in LG v SSWP [2021] UKUT 121 (AAC). The claimant argued that Johnson and Pantellerisco both applied, making the decision to take both payments into account irrational. However, Judge May held that neither of these cases was applicable. Johnson did not apply because this was not a case of the non-banking day salary shift (as the claimant was not paid monthly) and the work allowance was not impacted. Moreover, Pantellerisco did not apply because there was no issue with the benefit cap in this case. The subsequent decision of the Court of Appeal in Pantellerisco establishes that, even if the benefit cap does apply, an irrationality argument would not succeed. Therefore, the prospects for those who are paid 4-weekly would appear to now rest on the untested argument that the regulations are discriminatory. CPAG set out the details of this argument on their website. It may still be worth pursuing a mandatory reconsideration and appeal based on this argument.
Claimants whose cases are not ‘on all fours’ with either case (for example, who are paid weekly or fortnightly) should seek advice on their prospects of success.
Citizens Advice advisers can also contact the Expert Advice Team for support.
Lawrence Barratt is a Help to Claim Expert in the Expert Advice Team at Citizens Advice
References
[1] Universal Credit: welfare that works, DWP publication, November 2010
[2] Welfare Reform Act 2012, section 8(1) & 8(3)
[3] There are 2 different work allowances for eligible claimants. Those whose UC award includes a housing costs element (HCE) receive the lower allowance of £292. Those whose award does not include a HCE receive the higher allowance of £503.
[4] UC Regs 2013, Reg 61
[5] R (On the Application Of) Johnson & Ors v SSWP [2019] EWHC 23 (Admin)
[6] For example, section 7 of the WRA says that UC is payable ‘in respect of each complete assessment period’
[7] Pantellerisco and others v SSWP CO/3572/20198
[8] 2019 UKSC 52
