Can an employer pay holiday on termination at a lower rate than entitlements under Working Time Regulations 1998 (WTR) if the employee agrees to this by way of a clause in his contract of employment?
No, ruled the Employment Appeal Tribunal (EAT) in the recent decision of Connor v Chief Constable of West Yorkshire Police [2023].
Facts
Mr Connor (C) was employed by the Chief Constable of West Yorkshire police (CCWYP) from November 2002 to May 2020. C was suspended from work February 2019 and signed off work sick with ill health later that month, not returning to work prior to being dismissed in May 2020.
C’s employment contract stated that payment of holidays on termination of employment would be “based on 1/365th of annual salary for each day’s leave”. C worked a regular 37-hour week with salary paid in monthly instalments.
During employment, C received the equivalent sum for a week of holidays as he would for a week of working, but on termination the calculation was on the 1/365th basis, resulting in C being paid less than if he had taken the holiday. He brought an unlawful deduction of wages claim following his dismissal.
The Employment Tribunal (ET) ruled that the rate set out in the contract was what should be used as this was part of a ‘relevant agreement’ for the purposes of the WTR – see below.
C appealed, and the Employment Appeal Tribunal ruled in its favour.
Law
The relevant law on holidays and pay is derived from the following:
The EU Working Time Directive (WTD) provides at Article 7 for annual leave of at least four weeks and that it cannot be replaced by an allowance in lieu, except where employment is terminated.
Under the WTR, Regulation 13 and 13A set out entitlement to annual leave and the period of additional annual leave (provided by the UK) as 4 weeks and 1.6 weeks respectively.
WTR, Regulation 14(3) provides payment shall be:
(a) such sum as may be provided for the purposes of this regulation in a relevant agreement, or
(b) where there are no provisions of a relevant agreement which apply, a sum equal to the amount that would be due to the worker under regulation 16 in respect of a period of leave determined according to the formula
(A × B) – C
where
(A) is the period of leave to which the worker is entitled under regulation 13 and regulation 13A;
(B) is the proportion of the worker’s leave year which expired before the termination date, and
(C) is the period of leave taken by the worker between the start of the leave year and the termination date.
WTR, Regulation 16, sets out “A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13 and regulation 13A, at the rate of a week’s pay in respect of each week of leave.”
WTR, Regulation 2, sets out that a relevant agreement “in relation to a worker, means a workforce agreement which applies to him, any provision of a collective agreement which forms part of a contract between him and his employer, or any other agreement in writing which is legally enforceable as between the worker and his employer”.
Decision
The EAT overturned the ET’s decision, ruling that a ‘relevant agreement’ under WTR Regulation 14(3) cannot result in payment of holiday pay on termination of employment that is lower than that which is calculated using the WTR method of calculation and as such C was found to be due the higher amount of holiday pay, and had suffered an unlawful deduction of wages.
The EAT set out the correct calculation that would comply with the WTR, pointing out that the starting point is a normal working week, based on what the employee gets paid in a normal working week, as follows:
- Divide the annual pay figure by 52.
- Establish the proportion of the leave year that has elapsed (less any leave taken).
- Multiply the result in step 1 by the result in step 2.
It highlighted the purpose of Regulation 14 WTR is to supplement Regulation 13, to promote the right to take the leave and be paid in full for it.
Comment
Katherine Irvine, Associate in our Employment team comments:
“Calculating annual leave can be a complicated matter and as such employers are best advised to carefully check their calculations to ensure the result does not fall foul of the law. It is of interest perhaps that despite the duration of litigation and cost to all involved, the sum CCWYP was ordered to pay to C was £53.90.
“Employers will need to ensure that a ‘relevant agreement’ (such as their contract) which is in place does not provide a result that means the employee gets less, either leave entitlement or pay, than they would under the WTR.
“The EAT’s straightforward explanation as to how to approach the calculations (above) should hopefully help remove some of the perceived complexity around this and avoid expensive, lengthy litigation.”
