Workers’ holiday pay rights have been bolstered by the recent case law decision of the Employment Appeal Tribunal in the case of Connor v Chief Constable of the South Yorkshire Police.
Can employers pay less holiday pay?
The question raised was: Can employers pay a lower rate of statutory holiday pay to a worker at the end of their employment compared to the payment of holiday pay they would have received during their employment?
Calculation of holiday pay is a confusing area for employers and it has been much litigated in recent years. The focus has mainly been on how to calculate holiday pay for annual leave that has already been taken. This latest case provides clarity on how to calculate holiday pay at the end of employment.
Recent law on statutory holiday pay
Holiday pay case law has developed in support of the underlying health and safety purpose of the original EU legislation (the Working Time Directive), which the UK implemented by way of the Working Time Regulations 1998 (WTRs). This is that the requirement to provide workers with paid annual leave is a health and safety measure to ensure that workers take a break from work. Staff should not be discouraged from taking holiday and therefore holiday pay should not be less than the pay they would have received when at work. This has meant case law has developed to confirm that regular, variable payments that some workers receive as their normal remuneration such as overtime, commission, shift rates should be taken into account in the calculation of statutory holiday pay.
This new case of Connor v Chief Constable of the South Yorkshire Police provides guidance on how to correctly calculate a payment in lieu of untaken holiday at the end of employment. Regulation 14 of the WTRs appears to provide for more flexibility at that point in time. While employers may calculate pay in lieu of holiday in the same way as during employment, the Working Time Regulations also provides for calculation of payment upon termination of employment under a “relevant agreement”. A ‘relevant agreement’ can simply be (as in this case) a contract of employment that incorporates a term on how to calculate holiday pay at the end of employment.
The facts
The employee (Mr Connor) had been employed for 18 years and worked a consistent 37-hour week. When he took a week’s leave during employment, he received the same pay as he did when working.
The parties were in agreement about how much holiday was due (40 hours 42 minutes), but not how the holiday pay should be calculated.
Mr Connor’s employment contract included a provision that at the end of his employment “Payment will be based on 1/365th of annual salary for each day’s leave.” The Employment Tribunal decided his employer had made this calculation correctly using the “relevant agreement” in his contract of employment.
Mr Connor argued that using 365 days (or calendar days) to calculate his holiday pay, rather than using working days meant his holiday pay was less than his normal remuneration during his employment. Mr Connor believed this was wrong and brought a claim for unlawful deduction from wages in the Employment Tribunal, which he lost and then successfully appealed to the Employment Tribunal.
The Employment Appeal Tribunal (EAT)
The EAT confirmed Mr Connor had been underpaid. Furthermore, it held that taking annual leave is important for health and safety reasons and if a lower amount of holiday pay was paid, it would undermine this principle and go against the purpose of the Working Time Regulations (WTRs) that holiday pay should equal the pay an employee receives while working. The EAT also decided that Regulation 14 did not modify this principle and a ‘relevant agreement’ should include a formula that meets the minimum rights in the WTRs.
The practical effect in this case was that the EAT ordered the employer to pay the claimant the rather small sum of £53.90. But, it is clear this was a hotly litigated case and an employer dealing with a claim for unpaid holiday pay is likely to incur management time and legal costs in dealing with it. Workers may be determined to make a point in bringing a claim and may be supported by a union in doing so or as in this case, Advocate, a scheme for free legal assistance.
What should employers do now?
When employers are calculating accrued but untaken holiday pay on termination of employment, the starting point is to ensure the same amount that would have been paid for the holidays that are due had the worker been working is paid upon termination of employment. Then multiplying this by the figure reached using the formula to calculate the amount of untaken holiday accrued in the WTRs.
It is worth noting this EAT decision only applies to the statutory holiday entitlement of 5.6 weeks. Therefore not to paid holiday that exceeds this minimum statutory amount for which payment could be calculated differently. For example, some contracts of employment specify that staff will only receive statutory holiday pay if dismissed for gross misconduct and any greater contractual holiday entitlement is disapplied.
It is important to correctly calculate holiday pay, both during employment and on termination of employment, otherwise an employer risks facing employment claims. The employment team at Stephens Scown LLP is well placed to help with such matters.
If you have any further enquiries regarding holiday pay please contact our Employment Team.