Holiday pay on termination: 'relevant agreement'
When calculating pay for accrued but untaken statutory holiday at the end of employment under the Working Time Regulations, an employment contract (or other agreement) cannot stipulate a formula for calculating that holiday pay which would result in a worker being paid less than the usual amount they would have been paid for working.
The rules around calculating pay on termination of employment are expressed differently in the Working Time Regulations 1998 from the formula for payment for leave actually taken. Pay in lieu may be calculated in the same way as pay for leave taken but, if employers have in place a ‘relevant agreement’ (which can simply be a clause in the employment contract), they may pay such sum as is determined by that agreement (WTR, reg. 14). This would appear to allow them to make payments on termination that do not precisely reflect what the worker would have been paid had they taken the leave during their employment.
Mr Connor was dismissed following a lengthy period of sickness absence. It was agreed that he was entitled to be paid in lieu of holiday accrued but untaken at the end of his employment but there was a dispute about how it should be calculated.
Mr Connor’s contract contained a clause providing that pay on termination would be calculated at the accrual rate of 1/365th of annual salary for each day’s leave. However, had Mr Connor taken the holiday during his employment, he would have received the same amount of pay for time spent on holiday as he would have got had he been at work. The use of the 1/365th formula resulted in his accrued holiday being less than his salaried rate of pay. He brought a tribunal claim to recover the shortfall. A tribunal rejected his claim, holding that Mr Connor’s holiday pay had been correctly calculated according to the ‘relevant agreement’, i.e. his contractual term. He appealed.
The appeal was allowed.
The taking of annual leave is important to fulfil the health and safety purpose underpinning the Working Time Directive and the WTR. How holiday pay is calculated is important to the extent that the purpose of the legislation would be undermined if pay was anything other than usual pay, as workers would not be inclined to take the leave if it meant their pay would drop during it. As such, the EAT held, any payment below that of normal wages would not be in accordance with the WTR.
A ‘relevant’ agreement’ can alter the approach to calculating accrued holiday pay – but it must provide for a calculation method that is in keeping with the rights provided for in the WTR. It cannot provide for a payment that results in the worker receiving less than they would have been paid for having worked during that period. The tribunal had taken too literal an interpretation of ‘relevant agreement’, resulting in a decision that was contrary to the purposes of the WTR. Mr Connor had therefore been underpaid.
The usual method of calculation for holiday pay is 260ths of annual salary for full-time employees working five days a week. This is because there are only 260 working days in a year, when all weekends are taken out. Most employers use this as the standard way of calculating holiday pay.