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Owen v. Chief Adjudication Officer [1999] UKSSCSC CIS_4312_1997 (29 April 1999)

R(IS) 8/99
(Owen v. Chief Adjudication Officer)

Mr. P.L. Howell QC CIS/4312/1997
10.3.98

CA (Beldam, Roch and Mummery LJJ)
29.4.99

Income – regulation requiring final payment of sick pay on termination of employment to be taken into account during period of claim for income support – whether ultra vires or irrational

The claimant was absent from work through sickness and was paid sick pay in arrears. His employment was terminated on the day he received his last sick pay. He immediately claimed income support. His claim was disallowed because, in calculating the claimant's income, the adjudication officer took account of the last payment of sick pay as, by virtue of regulation 35(2) of the Income Support (General) Regulations 1987, it was not earnings and, by virtue of regulation 29(2), it fell to be taken into account over the four weeks after it was paid. The claimant's appeal to a tribunal was dismissed as was his appeal to the Commissioner. He then appealed to the Court of Appeal, contending that regulation 29(2) was ultra vires and was irrational because it required a claimant to make one month's sick pay last two months and it created an anomaly because employed earners had their last payment of earnings disregarded under regulation 36(2) of, and paragraph 1 of Schedule 8 to the 1987 regulations.

Held, dismissing the appeal, that:

regulation 29(2) was validly made under section 136(5)(a) of the Social Security Contributions and Benefits Act which permitted circumstances to be prescribed in which a person was treated as possessing income which he did not in fact possess;

the fact that the regulation produced a hard case or anomaly did not necessarily make it irrational and it had not been shown that no reasonable Secretary of State, properly directing himself, could have made such a regulation giving different treatment to earnings and sick pay.

DECISION OF THE SOCIAL SECURITY COMMISSIONER

My decision is that the decision of the social security appeal tribunal given on 24 June 1997 on this claim for income support was not erroneous in law. The claimant's appeal against it therefore has to be dismissed. This is a conclusion I reach with considerable regret, as the claimant appears to me to be a victim of an unjust anomaly in the income support regulations. If nothing else I hope his appeal will bring the anomaly to the attention of the Secretary of State so that she can consider putting it right for similar cases in the future.

I held an oral hearing of this appeal at which Andrew Buchanan-Smith, solicitor, appeared for the claimant and Claire Robinson of Counsel, instructed by the solicitor to the Department of Social Security, appeared for the adjudication officer. I am grateful to both of them for their helpful submissions on the point of law involved.

There is no dispute about the facts, and the issue before the tribunal, which was whether the claimant was entitled to income support for the period of four weeks immediately after his employment terminated at the end of October 1996, depends simply on whether the income support regulations have the effect they appear to have. According to the facts recorded by the tribunal the claimant who is a man now aged 35 became terminally ill in September 1996 and had to stop working. For a four week period in October 1996 after he had ceased to be able to go to work his contract of employment with his employer continued, and he was paid statutory sick pay and contractual sick pay under his employer's scheme. These came to a gross amount of £500 for the month, reduced to an actual payment of some £450 after deduction of tax and national insurance contributions. This amount was paid to him on 31 October 1996, in place of the salary he would normally have received then for that month.

There is no doubt or dispute that the sick pay, like the salary, was paid in arrears so that what the claimant received on 31 October 1996 was for the past period and not for the future. On the same date his employment was terminated, and as he had no further earnings or resources of his own (apart from a few hundred pounds in savings) he claimed income support. According to his own evidence (see eg the letter of 28 November 1996 at page 46) much of the October payment was needed to pay bills and expenses already incurred for that month, and as income support is now itself only paid in arrears (Schedule 7 Social Security (Claims and Payments) Regulations 1987 [SI No. 1968]) it was necessary for him to make an immediate claim to prevent there being a gap in the money he needed to live on in the succeeding weeks.

A person who receives a final payment of wages in arrears on termination of his employment is given help over exactly this problem, by having the final wages payment left out of account to enable him to become immediately entitled to income support: see regulation 36(2) and Schedule 8 paragraph 1, Income Support (General) Regulations 1987 [SI No. 1967]. There can be no doubt that the purpose of this was to tide people over the hiatus period they would otherwise suffer from the system of payment in arrears. The Government statement to the House of Commons on 12 November 1987 at page 65 of the case papers makes this clear:

"I think that the new system will be simpler and more clearly understood ... as part of the package, we will disregard last earnings ... They will be disregarded completely in terms of the calculation for income support. ... Claimants will now be able to use any final earnings to live on while awaiting their first benefit payment. They will no longer be excluded for the period covered by their last earnings. That is, I believe, a far more sensible arrangement ..". (Hansard, 12 November 1987 col. 606)

Precisely the same considerations appear to me to apply to the present claimant in relation to the month's sick pay he received in place of a final month's earnings. There appears to me no logical distinction between the two at all, and the moral claim of a person in the claimant's position is if anything stronger.

However as the regulations stand the claimant's application for income support was rejected for the first 28 days of his claim from 1 November 1996 on the simple but in my view unanswerable ground that the "sensible arrangement" described above for final earnings payments applies only to earnings, and that "earnings" are defined by regulation 35(2) of the Income Support Regulations so as to exclude any remuneration paid by or on behalf of an employer to the claimant in respect of a period throughout which he is absent from work because he is ill. The consequence of this is that the sick pay is so far as the regulations are concerned "income other than earnings", and counts as income of the claimant for the same length of time as the month for which it was actually paid, but measured forwards from the date of payment instead of back. Thus the claimant was treated as having a continuing income for another four weeks after 31 October 1996 by regulation 29(1), 29(2) and 31(1).

For "income other than earnings" there is nothing to correspond with Schedule 8 paragraph 1 above to enable final payments of sick pay in arrears to be left out of account; and the only deductions allowed in the calculation are those for income tax, Class 1 national insurance and any pension contributions under Schedule 9, paragraphs 1 and 4A. The claimant is not even allowed the minimum flat rate deduction of £5 that would apply to earnings under Schedule 8 paragraph 9.

Mr. Buchanan-Smith sought to argue before me, as he had before the tribunal, that if the regulations really do have this effect they must be outside the powers of the enabling legislation. The purpose of this, in his submission, was limited to allowing a claimant's income to be calculated or estimated in some rational manner, not to imputing to him a completely fictional income in the relevant weeks when in fact he had none at all. However the tribunal were right in my view to reject this argument. The enabling powers in s. 136 Social Security Contributions and Benefits Act 1992 are in the widest possible terms: as Lord Donaldson observed in CAO v. Foster [1992] QB 31, 45 they allow the Secretary of State "to prescribe that black is white and that nothing is something and vice versa in the context of income and capital". As well as s. 136(4) to which the tribunal referred (providing for the income of a week to be calculated by reference to a period which need not include the week concerned at all) the regulations at issue in this case appear to me to fall squarely within s.136(5) which with chilling simplicity lays down that

"(5) Circumstances may be prescribed in which –

(a) a person is treated as possessing capital or income which he does not possess; ..."

In my judgment this is conclusive. In the relevant week the claimant had no income but the regulations prescribe that his resources are to be assessed as though he did. This is what s. 136 allows them to do. The mere fact that I find the result anomalous does not enable me to construe the regulations contrary to what they plainly say, or to strike down as "irrational" the wording Parliament has been persuaded to approve.

For those reasons I have no doubt that this appeal has to be dismissed, though I share the tribunal's unhappiness at the apparent unfairness of the regulations and I hope that in the light of what is said above they can be looked at again so that some good can come out of it for other people in a similar position.

Date: 10 March 1998 (signed) Mr. P.L. Howell QC

Commissioner

The claimant appealed to the Court of Appeal. The decision of the Court of Appeal follows.

DECISION OF THE COURT OF APPEAL

Mr. P. Stagg (Instructed by Speakeasy Advice Centre, Cardiff CF2 4TA) appeared on behalf of the Appellant.

Mr. J. R. McManus (Instructed by the Solicitor to the Director of Social Services, London WC2A 2LS) appeared on behalf of the Respondent.

LORD JUSTICE MUMMERY:

The Facts

Mr. Shane Owen worked as a production assistant with the Electronic Page Company from 29 April 1996 until September 1996 when he was diagnosed as suffering from a terminal illness. He was advised by his consultant not to return to work. On 31 October 1996 his employment was terminated. He was paid his last month's contractual and statutory sick pay in arrears. That amounted to the sum of £451.56, half of his normal wages.

On the following day he claimed income support for the period 1 November to 27 November 1996. He submitted that he had had to use the money received from his employer for the month of October and that he was unable to pay the same bills in November. He did not receive any sick pay or other pay from his employer for that period.

On 14 November 1996 the adjudication officer rejected Mr. Owen's claim on the ground that the Income Support (General) Regulations 1987 (the 1987 Regulations) required the sick pay received by Mr. Owen to be taken into account for the first four weeks (less one day) of his claim for income support. This was the case, even though the sick pay received by Mr. Owen at the end of October was paid in arrears. In consequence of that decision Mr. Owen received no income support for the first four weeks of November. Benefit was awarded to him only with effect from 28 November 1996.

The Appeals

Mr. Owen appealed to the social security appeal tribunal. On 24 June 1997 his appeal was dismissed. The appeal tribunal held that the adjudication officer had correctly (a) applied regulations 29, 31 and 35 of the 1987 regulations and (b) rejected Mr. Owen's contention that regulation 29 was ultra vires section 136 of the Social Security Contributions and Benefits Act 1992 (the 1992 Act).

Mr. Owen appealed to the Social Security Commissioners. That appeal was dismissed by Mr. Commissioner Howell on 10 March 1998 on the ground that the decision of the appeal tribunal was not erroneous in law. He held that the effect of the 1987 regulations was that Mr. Owen was treated as having a continuing income for another four weeks after 31 October 1996 and that those regulations fell squarely within the empowering provisions of section 136(5) of the 1992 Act. In dismissing the appeal he commented (paragraph 1):

"This is a conclusion I reach with considerable regret, as the claimant appears to me to be a victim of an unjust anomaly in the Income Support Regulations. If nothing else I hope his appeal will bring the anomaly to the attention of the Secretary of State so that she can consider putting it right for similar cases in the future".

Mr. Owen then sought leave to appeal to the Court of Appeal on a point of law. The Social Security Commissioner refused leave to appeal on 21 April 1998. On 20 July 1998 a single Lord Justice refused a paper application for leave to appeal on the ground that the Social Security Commissioner was entirely right for the reasons which he gave, but adding that he wholly shared "his unhappiness that the regulations should so provide."

Leave to appeal was granted on 20 October 1998 on a renewed application to two Lords Justices on the ground that the ultra vires argument under section 136(5) of the 1992 Act was arguable and should be considered by the Court of Appeal.

The 1987 Regulations

The 1987 Regulations were originally made under section 22 of the Social Security Act 1986 and have been continued in force by virtue of the provisions of the 1992 Act.

A person in Great Britain is entitled to income support if he has no income or his income does not exceed the applicable amount and he is not engaged in remunerative work. Where a person is entitled to income support for a period, the amount payable for that period is calculated in such manner as may be prescribed: Section 124(1) and (5) of the 1992 Act.

Chapter II of the 1987 Regulations is concerned with "Income" and regulation 29 with the calculation of earnings derived from an employed earner's employment and income other than earnings. It provides

"29(1).... Earnings derived from employment as an employed earner and income which does not consist of earnings shall be taken into account over a period determined in accordance with the following paragraphs and at a weekly amount determined in accordance with regulation 32 (calculation of weekly amount of income).

(2) Subject to the following provisions of this regulation the period over which a payment is to be taken into account shall be -

(a) in a case where it is payable in respect of a period, a period equal to the length of that period;

(b) .......

and that period shall begin on the date on which the payment is treated as being paid under regulation 31 (date on which income is treated as paid)."

Regulation 31 is concerned with the date on which income is treated as paid.

"(1) Except where paragraph (2) applies, a payment of income to which regulation 29 (calculation of earnings derived from employed earner's employment and income other than earnings) applies shall be treated as paid -

(a) in the case of a payment which is due to be paid before the first benefit week pursuant to the claim, on the date on which it is due to be paid;

(b) in any other case, on the first day of the benefit week in which it is due to be paid or the first succeeding benefit week in which it is practicable to take it into account.

(2) Income support....... shall be treated as paid on the day of the benefit week in respect of which it is payable."

Regulation 35 relates to the earnings of employed earners and provides

"(2) "Earnings" shall not include –

(a) .....

(b) any remuneration paid by or on behalf of an employer to the claimant in respect of a period throughout which the claimant.....is absent from work because he is ill;"

It is accepted on behalf of Mr. Owen that sick pay is remuneration which is excluded from the definition of "earnings" and that the effect of these regulations, if validly made, is to require the sick pay which he received on 31 October 1996 to be taken into account when assessing his income for the first four weeks of his claim in November 1996, even though the sum received from his employer at the end of October was paid in arrears. Even though the sick pay was paid in arrears it is projected forwards for the purpose of determining entitlement to income support.

Mr. Owen's contention is that the provisions of regulation 29(2) which produce this result are ultra vires Section 136 of the 1992 Act. It is common ground that it is permissible to challenge the validity of the 1987 regulations before the adjudicating authorities, as well as on an application for judicial review: Chief Adjudication Officer v. Foster [1993] AC 754 at 762C-763D, 766H-767B. Alternatively, the anomaly produced by the regulation demonstrates that the regulation is irrational and should be set aside by the court on that ground.

The 1992 Act

Section 136 is in Part VII of the 1992 Act which deals with "Income - Related Benefits". Section 136 is concerned with income and capital and provides

"(1) ....

(2) ....

(3) Income and capital shall be calculated or estimated in such manner as may be prescribed.

(4) A person's income in respect of a week shall be calculated in accordance with prescribed rules; and the rules may provide for the calculation to be made by reference to an average over a period (which need not include the week concerned).

(5) Circumstances may be prescribed in which -

(a) a person is treated as possessing capital or income which he does not possess;"

The Ultra Vires Point - Mr. Owen's Submissions

It was submitted by Mr. Stagg, on behalf of Mr. Owen, that regulation 29(2) is ultra vires section 136(3),(4) and (5)(a). It is unnecessary to deal with the arguments on subsection (4) since that provision is not relied upon by the Secretary of State; he relies principally on section 136(5)(a) as the relevant enabling power. Reliance is also placed on section 136(3).

Mr. Stagg's submissions are briefly as follows:

(1) Section 136(5)(a) permits circumstances to be prescribed in which a person is treated as possessing income which he does not in fact possess. It only applies to a case of creating income where none existed or where the claimant had no income. The critical question is whether regulation 29(2) treats him as possessing income which he does not in fact possess? Mr. Stagg answers "No-quite the reverse": it treats him as possessing income which he did in fact possess (ie the income paid to him by his employer in arrears on 31 October). It treats him as possessing that income in respect of a different period (ie the first four weeks of November). The result was that the adjudication officer took into account under regulation 29(2) income which he did in fact possess. Section 136(5)(a) does not permit circumstances to be prescribed treating income received by the claimant at one time as available to him at another time.

(2) Regulation 29(2) is also ultra vires section 136(3). That regulation only allows income to be "calculated or estimated" in a prescribed manner. Regulation 29(2) does not prescribe that income is "calculated" or "estimated" in a particular manner or at all. The effect of regulation 29(2) is to create income for a forward period or to transpose income to a period following the period for which it was paid or to impute to Mr. Owen income for the first four weeks of Mr. Owen's claim which does not relate to that period. When income is "calculated or estimated" the process must have some correspondence with reality-either to the arithmetical process of calculating actual figures or to an estimate of true values. This regulation simply shifts income from one period to another. That is neither calculation nor estimation. This regulation does not have the effect permitted by section 136(3). It is ultra vires.

Irrationality - Mr. Owen's Submissions

Even if regulation 29(2) is intra vires section 136(5)(a) and (3), the closing words of regulation 29(2) should be struck down on the ground of irrationality. This argument was developed in the following way:

(1) The powers conferred by section 136 must be exercised so as to promote and not to defeat the primary purpose of the 1992 Act.

(2) The primary purpose of the income support scheme is to provide a safety net for those who are without sufficient resources to support themselves. It is a benefit of last resort.

(3) Regulation 29(2) defeats the purpose of this scheme, because it disentitles Mr. Owen from income support for a period of four weeks during which he has no income and is incapable of work. He is required to make one month's sick pay last for two months.

(4) Under the 1987 regulations employed earners have their last wages disregarded: see regulation 36 and Schedule 8. It is anomalous that those who are sick do not have their last payment of sick pay disregarded. This anomaly, identified by the Social Security Commissioner, flies in the face of common sense. This absurd state of affairs calls for a rational explanation by the Secretary of State. None has been supplied. Accordingly, the closing words of regulation 29(2) should be set aside as irrational. This court has recently held in O'Connor v. Chief Adjudication Officer (3 March 1999) that

"Irrationality is a separate ground for challenging subsidiary legislation, and is not characterised by or confined to a Minister's deceit of Parliament or having otherwise acted in bad faith. That means irrationality in the Wednesbury sense."

See Auld LJ at page 21. This ground of challenge may be available even where, as in that case, the regulation-making power was subject to the negative resolution procedure; but the evidential onus is a heavy one and often, as Auld LJ observed at 22,

"...the Court, however well informed in a factual way, may be reluctant to form a view on the rationality of a policy based on political, social and/or economic considerations outside its normal competence."

Mr. Stagg went as far as to assert that this was a case where Parliament had been misled by the Minister about the effect of the Regulations on the calculation of income support. His references to passages in Hansard did not, however, begin to make out this particular ground of complaint.

Conclusion

In my judgment, this appeal should be dismissed on the short ground that regulation 29(2) is intra vires section 136(5)(a) of the 1992 Act: it is a deeming provision prescribing circumstances in which a person is treated as possessing income he does not possess. He may not in fact possess income in a relevant period for a number of reasons: he may never have possessed the income at all; he may have in fact possessed the income at an earlier period, but he does not possess it at a later period. In the latter case a person may be treated as possessing income in a later period, even though it was paid in respect of an earlier period and even though he has already spent all the income that he did in fact possess at the earlier period. Section 136(5) permits deeming provisions to be made in respect of the possessing of income. By their very nature deeming provisions have the effect of treating a fact or a state of affairs as existing for a stated purpose when that that fact or state of affairs does not in truth exist. These enabling terms are framed widely enough to authorise a provision spreading or apportioning income possessed by a claimant over a stated period by treating it as possessed by the claimant in a period in which he did not in fact possess it.

I would also reject the argument on irrationality. The fact that the regulation produces a hard case or an anomaly does not necessarily make it irrational. Rules apportioning income received over a period are not intrinsically irrational or unfair. It has to be shown that no reasonable Secretary of State, properly directing himself, could make such a regulation giving different treatment to earnings and to sick pay. This has not been demonstrated in this case.

The situation would, however, appear to be unsatisfactory and would justify a review of the operation of the regulations by the Secretary of State. As Lord Bridge said in Foster (supra) at 773E

"...that is a matter for the Secretary of State and Parliament, not for the courts."

LORD JUSTICE ROCH: I agree.

LORD JUSTICE BELDAM: I also agree.

Order: Appeal dismissed with no order as to costs, save Legal Aid Taxation; leave to appeal to the House of Lords refused. (This order does not form part of the approved judgment)