Universal credit – the court’s decision
01 March 2019
This article was featured in the March 2019 issue of the magazine.
Mike Nicholas, editor, summarises the law, the arguments and judgment in a judicial review case that has profound implications for the way by which calculation of the amount of each month’s benefit is to be performed
Following the general election in 2010, the coalition government progressed the Conservative party’s manifesto pledge to introduce universal credit (UC) to replace several other social security benefits. The delivery of this new benefit would require the use of employment earnings obtained from employers (and pension payers) in real time rather than being based on averaging historical amounts of earnings obtained from the P14 annual returns submitted by employers.
Irrespective of any conceptual merit, UC has a troubled history, and there are many things seemingly amiss with the benefit which are causing severe financial difficulties for claimants. Design, operational and calculation problems continue to impede the implementation and delivery of UC. A particular issue is timing of pay days falling within the claimant’s UC assessment period. It has even been suggested that employers should change claimants’ contractual pay dates.
Unsurprisingly, there have been several cases dealt with by the courts (see https://bit.ly/2UUcytA). In a case from 2017 about the effect of timing of reporting of real time information the Department for Work and Pensions (DWP) withdrew its appeal against the tribunal’s decision (see https://bit.ly/2X4PkDa). Here the claimant’s earnings for January were reported as paid on 1 February 2016 whereas she said payment had actually been made on 31 January. The effect was that she had two payments in the assessment period 1 February to 29 February.
A very recent case (see https://bit.ly/2N6I7xK) heard at the High Court casts light on the implications of more than one monthly pay day in the UC assessment period.
Judicial review hearing
Four claimants (see below) sought judicial review of the proper method of calculating the amount of UC payable to each under the Universal Credit Regulations 2013 (‘the 2013 Regulations’). They challenged the method of calculation on the basis that it led to effects that were irrational, or failed to promote the policy and objectives of the underlying statute, the Welfare Reform Act 2012 (‘the 2012 Act’), and so was ultra vires the parent statute or that it led to unlawful discrimination contrary to Article 14 of the European Convention on Human Rights (‘the ECHR’) read with Article 1 of the First Protocol to the ECHR, those being Convention rights within the meaning of the Human Rights Act 1998. A claimant also contended that the defendant (the DWP) failed to comply with its duty to have due regard to certain matters as required by section 149 of the Equality Act 2010.
However, during the course of the court hearing it became clear that another more fundamental submission was available to the claimants.
The hearing of the claims took place on 27–28 November 2018, with Helen Hargreaves MSc ChFCIPPdip, CIPP associate director of policy, providing, via written witness statements, expert testimony about the payroll practices around pay dates falling on non-banking days.
The High Court’s judgment was handed down on 11 January 2019.
...it became clear that another more fundamental submission was available to the claimants
The claimants
Materially similar circumstances apply to the four claimants: Ms Johnson, Ms Woods, Ms Barrett and Ms Stewart.
Ms Johnson is employed by a large local authority and contractually paid on the last banking day of each month. She was paid salary on Thursday 30 November 2017 and on Friday 29 December 2017. As two months’ salary had been received in the assessment period 30 November to 29 December the UC for this period had been calculated as if she had received two months’ salary in that period. In the next assessment period, running from 31 December to 30 January, Ms Johnson was treated as having no earnings, which meant she lost the right to retain £192 of her earnings when the UC amount was calculated. The DWP declined her request to reconsider the calculations.
Ms Woods, who works for a county council, is paid monthly on the last working day of each month. In 2017, Ms Woods was paid her November salary on 30 November 2017 and her December salary on 29 December 2017, both of which fell in her UC assessment period to 29 December.
Ms Barrett, a health care assistant, has an assessment period that runs from 28th of one month to 27th of the next. There have been occasions when two months’ salary have been paid to her during one assessment period.
Ms Stewart, who works as a service adviser, has an assessment period that runs from 28th of one month to 27th of the next. She was paid salary on 28 September and then on Friday 27 October 2017 as the 28th was a Saturday.
All four claimants periodically suffer real financial loss by reason of the way in which UC is being calculated. There are times when they are not able to retain part of a month’s salary (the work allowance of £192) before any reductions in UC to reflect earned income. The claimants also referred to another difficulty that arises out of the method of calculation: the way in which UC is calculated in their cases leads to fluctuations in the amounts they receive which creates severe cash flow problems for them living as they do on low incomes with little or no savings.
...severe cash flow problems for them living as they do on low incomes with little or no savings
Arguments
The essential factual difficulty that arises is that because the claimants are paid their salaries monthly on or around either the last banking day or the last working day of the month there will be occasions when salaries for two different months are paid within one assessment period. The method adopted by the DWP to calculate the amount of an award of UC for that assessment period is to treat both salaries as earned income for that assessment period and to apply the method of deduction set out in regulation 22 of the 2013 Regulations to the combined income from the salaries for the two months that were received in that assessment period.
Mr Brown, for the DWP, submitted that the method of calculation applied is correct. He argued that regulation 54 of the 2013 Regulations means that the DWP must calculate the amount of an award of UC by reference to the actual amounts of earned income received in an assessment period. If, therefore, salaries for two different months are paid within the same assessment period, the calculation of UC must be based on the combined amount of those two months’ salary as the salary for each month was actually received in that assessment period. Further, Mr Brown submitted that the aim underlying the provisions governing calculation of UC was intended to enable an automated system to be established and that would preclude adjustments to take account of occasions when two monthly salaries were received in one assessment period. Mr Brown argued that it is not irrational to base a method of calculation on amounts actually received in a particular period, and that such a method of calculation does not involve any failure to give effect to the statutory purposes underlying the 2012 Act notwithstanding the problems that may arise when a claimant receives salaries for two months in one assessment period.
The High Court, however, noted that the precise words of regulation 54 need to be considered carefully, observing that two features appear from them: first, the exercise is the calculation of a person’s earned income “in respect of an assessment period”; and, second, that calculation is “to be based on the actual amounts received in that period”.
Regulation 54 does not provide that the amount of earned income “is to be the actual amounts” received “in” the assessment period. Rather, the amount of earned income is to be “based on” the actual amounts received. Furthermore, the purpose of the calculation is, as appears from the opening words of the regulation, to calculate the amount of a person’s income “in respect of an assessment period”.
Similarly, where information is supplied by the employer in accordance with regulation 61, the amount of “the person’s employed earnings from that employment for each assessment period is to be based on the information provided”. Again, the amount is not to be, for example, “the amount specified in the information provided”, but, rather, is “to be based” on the information provided. That, again, reinforces the view that the amount of earned income to be deducted is not necessarily the amount actually received in an assessment period but is to be based on those amounts. There is intended to be some other factor, not the mere mechanical addition of monies received in a particular period, which the calculation has to address. That other factor is the period in respect of which the earned income is earned. It is the earned income in respect of the period of time included within the assessment period that is to be calculated. That is to be based on the actual amounts received in the assessment period. There may, however, need to be an adjustment where it is clear that the amounts received in an assessment period do not, in fact, reflect the amounts of earned income received in respect of the period of time included within that assessment period
On a proper interpretation of regulation 54, read in context, the earned income of a claimant is the earned income he or she receives in respect of the assessment period, that is in respect of periods of time comprising the assessment period. The calculation will be based upon the actual amounts received. That will be the starting point and in many, perhaps in the vast majority of cases, may well be the finishing point of the enquiry that the legislation requires. However, there may need to be an adjustment where it is clear that the actual amounts received in an assessment period do not, in fact, reflect the earned income payable in respect of that period.
Mr Brown further relied on the fact that the system of UC was intended to be automated. He referred to the evidence in particular of Ms McMahon indicating the importance of automation in the design of the system of UC and indicating that it would not be possible to make an automated change to address the issue that has arisen in this case. Ms McMahon indicates that any solution would have to involve a manual calculation of the amount of the award.
The High Court judgment says that there are a number of answers to that. First, this is a question of statutory interpretation. If the regulations, properly interpreted, mean that the calculation must be done in a particular way, that is what the law requires. The court does not belittle either the administrative inconvenience or the cost involved but the language of the regulations cannot be distorted to give effect to a design which may have proceeded on a basis which is wrong in law.
...it is the employer not the employee who determines the date and method of payment...
Secondly, the existing regulations already contemplate manual intervention at some stages. Regulation 61 of the 2013 Regulations contemplates that there will be circumstances where the DWP cannot base a calculation on the information provided by the employers (for example, where the information is unlikely to be sufficiently accurate or timely). Then the DWP must calculate the person’s employed earnings using such information as the SoS thinks fit and that may involve treating a payment of employed earnings received in one assessment period as received in another. That indicates that there is no insurmountable problem in carrying out calculations, including calculations treating earned income received in one assessment period as being received in another assessment period. It may be that the number of instances where that will need to be done because of the problem which arises in this case will be greater than might otherwise have been anticipated by the DWP (although the DWP’s evidence is that it will be less than 1% of the UC caseload). Ultimately, however, the regulations properly interpreted require that exercise to be carried out and there is no insurmountable problem in doing so.
Mr Brown also submitted that one purpose underlying the 2012 Act, and the 2013 Regulations, was to encourage changes in behaviour. He submitted that it would be open to the employees to ask their employers to alter the date or the method of paying salaries so that the problem with two months’ salaries being paid within one assessment period would not arise. That, it seems, is suggested as a reason why the interpretation of regulation 54 adopted by the DWP would not necessarily lead to problems.
The High Court dismissed this argument. First, the ultimate question is whether, on a proper interpretation, regulation 54 is to be interpreted in the way contended for by the DWP and, for the reasons given above, it does not. Secondly, in these cases, and more generally, it is the employer not the employee who determines the date and method of payment. It is difficult to see how it could be said that the regulations were drafted on the assumption that any problems would be resolved by claimants asking third party employers to alter their payroll systems. Thirdly, Ms Johnson, Ms Woods and Ms Stewart did ask their employers to change their pay arrangements and the employers declined. Fourthly, whilst it may be that UC was intended to contribute to changed behaviour patterns, those would appear to be connected, at best, with encouraging or facilitating work in particular as a means of enabling those on low incomes to move out of poverty.
There is nothing to suggest that the behavioural changes envisaged included encouraging employees to request, and employers to make, changes to payroll arrangements. In any event, however desirable such behavioural changes may be (and that is a matter of policy for the executive and not a matter of law for the courts), there is no basis for inferring that the relevant regulations in this case were drafted on the assumption that such changes would occur. The SoS must apply the legislation as it currently is and as correctly interpreted.
The judgment
In reaching judgment, the High Court considered the factual situation of each claimant, and the legal framework governing the calculation of the amount of UC, before analysing the proper interpretation of the regulations governing that calculation in these cases.
On a proper interpretation of regulation 54 of the 2013 Regulations, read in context, the amount of the earned income of a claimant in respect of an assessment period is to be based on, but will not necessarily be the same as, the amount of earned income actually received in that assessment period. There will need to be an adjustment where, as in the present case, the claimant actually received two months’ salary in one assessment period but the combined salaries do not, in fact, constitute earned income in respect of the period of time included in that assessment period. The DWP, therefore, erred in treating the combined salary for those two months’ as earned income in respect of that assessment period for the purposes of calculating the amount of UC payable.
The claims for judicial review succeed on that basis. Accordingly, it is unnecessary and inappropriate to address other grounds which do not arise on the correct interpretation of the legislation. The only other ground which it is necessary and appropriate to address (based on section 149 of the 2010 Act) is not made out on the facts of this case.
... it is the employer not the employee who determines the date and method of payment...
Extracts of the 2013 Regulations
Regulation 54 of the 2013 Regulations, which is headed ‘Calculation of earned income – general principles’ provides that:
(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.
(2) Where the Secretary of State (SoS): (a) makes a determination as to whether the financial conditions in section 5 of the Act are met before the expiry of the first assessment period in relation to a claim for universal credit; or (b) makes a determination as to the amount of a person’s earned income in relation to an assessment period where a person has failed to report information in relation to that earned income – that determination may be based on an estimate of the amounts received or expected to be received in that assessment period.
Regulation 61, which is headed ‘Information for calculating earned income – real time information etc’ provides that:
(2) Where a person is, or has been, engaged in an employment in respect of which their employer is a RTI employer: (a) the amount of the person’s employed earnings from that employment for each assessment period is to be based on the information which is reported to HM Revenue & Customs (HMRC) under the PAYE Regulations and is received by the SoS from HMRC in that assessment period; and (b) for an assessment period in which no information is received from HMRC, the amount of employed earnings in relation to that employment is to be taken to be nil.
(3) The SoS may determine that paragraph (2) does not apply: (a) in respect of a particular employment, where the SoS considers that the information from the employer is unlikely to be sufficiently accurate or timely; or (b) in respect of a particular assessment period where: (i) no information is received from HMRC and the SoS considers that this is likely to be because of a failure to report information (which includes the failure of a computer system operated by HMRC, the employer or any other person); or (ii) the SoS 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.
(4) Where the SoS determines that paragraph (2) does not apply, the SoS must make a decision as to the amount of the person’s employed earnings for the assessment period in accordance with regulation 55 (employed earnings) using such information or evidence as the SoS thinks fit.
(5) When the SoS makes a decision in accordance with paragraph (4) the SoS may: (a) treat a payment of employed earnings received by the person in one assessment period as received in a later assessment period (for example where the SoS has received the information in that later period or would, if paragraph (2) applied, have expected to receive information about that payment from HMRC in that later period); or (b) where a payment of employed earnings has been taken into account in that decision, disregard information about the same payment which is received from HMRC.