The Court of Appeal has found that the system whereby a universal credit claimant is treated as receiving two payments of salary in an assessment period in which they are paid early (because the usual payday falls on a weekend or bank holiday), and no salary at all in the following period, is ‘irrational’, upholding the Divisional Court (Secretary of State for Work and Pensions v Johnson & Ors  EWCA Civ 778).
Although this is a social security case, it will directly affect the way payrolls should be structured because of the close links between employed earnings for universal credit and PAYE income. In this article I consider the Court of Appeal judgment, the nature of the DWP’s response, and what payroll departments should do in future.
The link between RTI and universal credit
The framework for universal credit was laid out in the Welfare Reform Act 2012, Part 1, but the operational detail is largely set out in regulations (the Universal Credit Regulations 2013 and amending instruments). The policy underlying universal credit was that benefit entitlement should follow the claimant’s earnings month by month, as ascertained for PAYE purposes if the claimant is in employment.
Accordingly, the earnings data which determines the amount of an employed claimant’s universal credit in an assessment period is that provided by their employer to HMRC via the Real Time Information (RTI) process ‘on or before’ the date of payment. The information is then passed to the DWP which allocates the earnings to an assessment period on the date on which it receives the information. The ‘assessment period’ for universal credit is each successive month beginning with the date of claim, which does not necessarily match the calendar month.
So long as a monthly payday falls within the assessment period which largely spans the pay period, all should be well – there will be one payment of wages per assessment period. The problem encountered in Johnson arises when there is a weekend or bank holiday on the normal payday so that salary is paid a few days early, which means there may be two payments of salary in the same assessment period and none in the next (referred to in the judgment as the ‘non-banking day salary shift’).
When this happens, the claimant’s universal credit is much reduced in the assessment period in which two salary payments fall. In extreme cases, this may result in the claimant’s entitlement being stopped altogether, so that they have to make a fresh claim. In addition, in the next assessment period when they are treated as receiving no payment of earnings (because that month’s salary has already been taken into account in the earlier assessment period), they are paid more universal credit than usual.
This fluctuating payment of benefit not only makes it exceedingly difficult for a claimant on a low income to budget, but they also lose money. This is partly because they incur bank charges and similar debts during the period when their benefit is cut. However, the main reason is that they lose entitlement to the ‘work allowance’ (the amount they can earn before their benefit starts to be withdrawn) in the assessment period in which they are treated as receiving no earnings. Thus in Johnson, where the claimants were four single mothers, the lead claimant lost benefits of approximately £500 a year because of the several months in each year when she lost the work allowance. According to Lady Justice Rose in the Court of Appeal, ‘in my judgment this is the most egregious aspect of the way the system works’.
A case history
The evidence given by one of the claimants graphically illustrates the effect this anomaly can have, even upon those in employment.
‘This might be thought to be unproblematic as it could be said that over several months a combination of lower and higher UC awards balance themselves out. However, as somebody managing on my own with a young boy on a tight budget this is simply not the reality. As a result of receiving very little or even no UC in some months, I have fallen into arrears with my rent by about £1800; I was taken to court in April  for non-payment of my council tax; and have been forced to rely on the food bank on 3 to 4 occasions and a charity called Christians Against Poverty who provided me with £70 of supermarket vouchers to ensure that my son and I have at least enough to eat. I have also had to borrow money from my family and friends: I owe my dad about £1500, my mother £200, my brother £100 and friends £50-£60. I have even had to take out a credit card to try and tide me over but have then just found myself unable to pay off my credit card and so getting further into debt. I currently have about £680 credit card debt.
Things became so desperate just before Christmas that I attempted suicide and did so again in March. As a result, a social worker has become involved with me and my son.’
What should employers do?
About 85,000 universal credit claimants may find themselves in this position, according to the Court of Appeal (at para 93).
Although it is not its problem, HMRC has devised a ‘work-around’: employers are instructed, where the normal payday falls on a non-banking day, to report the payment for RTI purposes on the normal payday rather than on the date when payment is actually made (CWG2: Employer further guide to PAYE, para 1.8). This may seem counter-intuitive in a system that depends on reporting ‘on or before’ payment, but it is currently the only way the problem highlighted in Johnson can be ameliorated. The Government has announced that HMRC has updated the guidance for employers “’which, if followed correctly, will further reduce the small numbers affected’.
Provided that employers follow those instructions, the correct monthly salary payments are taken into account in the correct assessment periods – but not all employers do. At a time when numbers of universal credit claimants have increased by approximately three million since March, employers and payroll agents would be well advised to check that the right procedures are being followed when paydays fall on weekends or bank holidays, so that their employees do not lose out.
It is also worth bearing in mind that a similar problem can occur if pay is reported to the DWP via the RTI data feed from HMRC after 9pm so that a payment of salary on day one is recorded by the DWP on day two. If day two happens to be in the next assessment period, that might result in the same lumpy distribution of benefit between the two assessment periods, with similar downsides for the claimant.
What will the Government do?
In an Urgent Question dated 25 June, within three days of the judgment being handed down, Will Quince MP, the Parliamentary Under-Secretary of State for Work and Pensions, confirmed that, having lost in both the High Court and the Court of Appeal, the Government did not intend to appeal further.
The Minister said that there was no actual cash loss to claimants because if they received two salary payments in one assessment period and none in the next, their increased benefit in the second period would make up for their loss in the first. That, of course, is plainly wrong, as the experience of the claimant cited above shows only too clearly. Not only do they miss out on the work allowance in the second period, but also if their deemed extra earnings in the first period means they are no longer entitled to universal credit, and they have to re-apply, their income is severely disrupted, as Stephen Timms MP pointed out during the debate.
However, the Minister did confirm that the Government is now ‘assessing the remedial options’, adding that it would not be a straightforward click of a switch. In so doing, the Government is heeding the judgment of the Court that previous refinements to the universal credit system have been carried out in response to problems that have emerged ‘without fatally upsetting the computer’ (para 83), so there is no reason why they should not produce a similar fix now.
The perils of automation
And thereby hangs a tale. Universal credit now caters for 5.3 million claimants, taking account of their earnings, their personal and family circumstances, their childcare responsibilities, and refining them all into an award of considerable complexity. It simply could not be done without automation. It is hardly surprising that the very automation that makes it all possible will occasionally throw up absurdities. The important thing is that these absurdities are ironed out during the test and learn phase of development, particularly where they have such a negative impact on the financial wellbeing of claimants. It is not so much the computer glitches that the judges referred to as irrational as the refusal of the DWP to do anything about them until forced. About that, Lady Justice Rose concluded her judgment with the trenchant observation that:
‘The threshold for establishing irrationality is very high, but it is not insuperable. This case is, in my judgment, one of the rare instances where the [Secretary of State’s] refusal to put in place a solution to this very specific problem is so irrational that I have concluded that the threshold is met because no reasonable [Secretary of State] would have struck the balance in that way.’