The calculation of holiday pay on termination is often an area which causes confusion for employers and there has historically been a lack of authoritative case law on the subject to clarify the matter, most likely due to parties not pursuing the issue because of the relatively small sums involved.
However, the recent Employment Appeal Tribunal decision in the case of Connor v Chief Constable of West Yorkshire Police has helpfully resolved some of this uncertainty which will be welcome news to many employers.
In this case, the Claimant’s contract of employment set out that his holiday pay on termination of employment would be calculated based on 1/365th annual salary. This formula (using calendar days) meant that, upon his termination, the Claimant received a lower payment for his accrued, unused holiday than that which he would have received if he had taken his holiday whilst still employed (as he would have received the equivalent of a week’s pay for a week’s holiday rather than five calendar days).
In the first instance, the Employment Tribunal held that the 1/365th method was a valid “relevant agreement” under Regulation 14(3) of the Working Time Regulations 1998 (WTR) which sets out that the amount of holiday pay due to an employee on termination of employment is either the amount produced by the formula set out in Regulation 14(3)(b) WTR or such other sum which is stated to be payable on termination pursuant to a “relevant agreement”. As such, the Employment Tribunal found that the Claimant had not suffered any unlawful deduction.
However, the Employment Appeals Tribunal (EAT) disagreed with this and stated that a “relevant agreement” under the WTR cannot provide for a payment which is lower than that calculated using the formula set out in the WTR i.e. what an employee would have been paid when taking annual leave while working. Therefore, in this case, the Claimant was entitled to the greater amount (i.e. £53.90 more).
A point also worth noting is that the EAT judge (HHJ Beard) adopted a simple approach to calculating holiday pay by keeping all calculations in weeks rather than days. His method of calculation was as follows:
- To 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;
- To 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
- To then multiply the accrued holiday by the employee’s annual salary divided by 52 weeks.
Key Takeaways
Employers should welcome this helpful clarification of an often-grey area of the law which finally addresses the issue of how (and how not) to calculate holiday pay on termination. It would also be wise for employers (or their legal advisers) to review their precedent contracts of employment in light of this recent decision as it makes clear than any clauses which would lead to an employee being paid less than the statutory amount on termination will not be effective.