Holiday pay: can you pay less than a 'week's pay' on termination?

In Connor v Chief Constable of South Yorkshire Police, the EAT had to determine how much an employee should receive, by way of a payment in lieu of untaken holiday, when his employment ended. Is there a default position that applies and can an agreement make different, less generous, provisions? 

Facts

Mr Connor’s contract of employment included a term which stated that, on termination, any holiday he’d accrued but hadn’t taken would be paid at a rate of 1/365. This calculation method meant that his holiday pay was lower than the amount he'd received during his employment which mirrored the ‘week’s pay’ provisions in the Employment Rights Act 1996. 

Mr Connor claimed that he had been underpaid and he brought an unlawful deductions from wages claim. His employers argued that it was entitled to pay Mr Connor at this rate because his contract of employment was a ‘relevant agreement’ under the Working Time Regulations 1998 and Regulation 14 allowed the parties to agree different methods of calculation on termination.

The tribunal held that the contractual terms complied with Regulation 14 and that the correct deduction was 1/365 for each day's leave Mr Connor was owed. He appealed to the Employment Appeals Tribunal.

Decision of the EAT

Mr Connor argued that applying calendar days rather than working days reduced his holiday pay below his normal remuneration. That was contrary to the purposes of the Working Time Directive, and previous decided cases, which had held that holiday pay had to reflect the amount an employee received whilst working. He also argued that using 1/365 could, in some cases, reduce holiday pay to less than the appropriate National Minimum Wage.

In response, the employers argued that it was allowed to pay a lower rate on termination - provided it had a relevant agreement in place with the employee which, here, was his contract of employment. It also referenced the Supreme Court’s decision in Hartley v King Edward IV College (which applied to deductions made for teachers on strike) which found that 1/365 was the appropriate rate and, it said, that principle applied to all contracts which involved the payment of a salary.

The EAT agreed that Mr Connor had been underpaid. As a general rule, it said that, any payment made in lieu of untaken holiday which was lower than an employee should receive during employment didn’t comply with the WTRs. A relevant agreement could change the basis of the calculation to avoid the default position set out in Regulation 14, but it couldn’t undermine this principle. In other words an employee has to receive the same daily rate for holiday irrespective of whether they take it during employment or receive it as a payment in lieu once their employment ended.

Do you need to change your workers' contracts of employment?

Many employers will include a contractual right to reduce the amount of holiday pay staff are entitled to receive if they’ve not taken all of their accrued holiday by the time they leave. This might be included in individual contracts of employment, or via workforce or collective agreements. This decision makes it clear that those terms are unenforceable and that anyone who is paid less than their normal ‘week’s pay’ will be able to bring a claim against their employer for unlawfully deducting their wages. 

Regulation 14 of the WTR’s provides a default provision that will apply if there is no agreement in place, or where the agreement is invalid as follows: 

(A × B) − C

• A is the period of leave to which the worker is entitled (5.6 weeks per year) 
• 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.

In this case, Mr Connor had 41 hours of leave owing. Using this method, he was entitled to the princely sum of £53.90. The fact that he was willing to litigate for such a small sum of money demonstrates that some workers value the principle over the amount in dispute. Plus, unions are often keen to support individual workers bringing claims, in order to obtain legal clarity on issues that impact their members. 

Please note: best practice is to change any contracts or other agreements that don't comply with the law to ensure that staff are paid at the appropriate rates for untaken statutory holiday. However, if you decide not to do this, you must make sure that you properly pay your staff for accrued holiday when they leave. You can continue to pay a nominal amount for any additional holiday you provide in excess of 5.6 weeks, but, ideally, you do need a clause in your contract explaining that staff take statutory holiday first each year, followed by additional contractual leave. Please contact our partner, Glenn Hayes, if you need help with this.

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