Calculation of holiday pay on termination of employment

Can an employer rely on an agreement to calculate payment in lieu of annual leave if this results in a lower payment than the employee would receive under the Working Time Regulations 1998 (‘WTR’)?

No, held EAT in Connor v Chief Constable of South Yorkshire Police (available here).

Background: When an employee leaves employment without taking all their accrued annual leave, they will be entitled to a payment in lieu of the untaken leave. Regulation 14(3) WTR (‘Regulation 14(3)’) states that the amount of holiday pay due is either that calculated by the formula set out in the WTR or such other sum which is stated to be payable on termination of employment under a ‘relevant agreement’.

Facts: The employee, Mr Connor, was employed by the South Yorkshire Police. He was suspended from work and signed off as sick (with depression and anxiety) later that month. He remained on sick leave until he was dismissed.

Mr Connor’s employment contract included a term which stated that holiday pay on termination of employment would be calculated based on 1/365th annual salary. The employer relied on this to calculate how much to pay him at the end of his employment. This resulted in Mr Connor receiving a lower payment than he would have received using the calculation set out in the WTR (and less than he would have been paid if he had taken the holiday). The employee believed he was entitled to the higher amount and he brought a claim for unlawful deduction from wages.

Tribunal decision

The Tribunal dismissed Mr Connor’s claim. It said that the 1/365th calculation set out in the employment contract was a valid ‘relevant agreement’ under Regulation 14(3). Therefore Mr Connor had not suffered an unlawful deduction.

Mr Connor appealed.

EAT decision

The EAT upheld Mr Connor’s claim. It said that a ‘relevant agreement’ under Regulation 14(3) cannot result in a payment which is lower than that which would be calculated using the method set out in the WTR. Mr Connor was entitled to the higher amount.

The EAT said the correct calculation is that provided in the WTR. It took a simple approach by keeping all calculations in weeks rather than days and said the calculation was as follows:

Divide the number of weeks of holiday by 52; for example, 5.6 weeks (statutory minimum in the UK) divided by 52 equals 0.11 weeks of holiday accrual per week;
Multiply the number of weeks in the year which had already lapsed by 0.11; for example, if 8 weeks had passed then this figure would be multiplied by 0.11 which is equal to 0.88; and
Multiply the accrued holiday by the employee’s annual salary divided by 52 weeks.

Implications: Where a ‘relevant agreement’ (including a term in an employment contract) results in employee getting paid less than under the WTR (either leave entitlement or pay) it should not be applied in respect of the statutory holiday minimum under the WTR of 5.6 weeks.

However, employers can continue to follow the terms of the employment contract in respect of any leave in excess of the statutory minimum entitlement. This means that (depending on the terms of the contract) in some cases they may not be entitled to any payment in respect of such excess leave (for example where an employee is dismissed for gross misconduct).

Calculation of holiday pay on termination of employment

Can an employer rely on an agreement to calculate payment in lieu of annual leave if this results in a lower payment than the employee would receive under the Working Time Regulations 1998 (‘WTR’)?

No, held EAT in Connor v Chief Constable of South Yorkshire Police (available here).

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