How is accrued holiday pay calculated upon termination of employment?
Following the decisions in Item Software (UK) Ltd v Fassihi and Sim v Rotherham Metropolitan Borough Council [1986], the Apportionment Act 1870 applies, in principle, to employment contracts. Accordingly, where annual salaries are paid periodically, whether monthly or weekly, such payments are apportioned at a daily rate of 1/365th of the annual salary in accordance with section 2 of the Act, unless the contract expressly provides otherwise (section 7).
The 1/365th method was reaffirmed by the Supreme Court in Hartley & Ors v King Edward VI College [2017] UKSC 39. In that case, the employees were teachers employed under annual contracts who regularly worked outside their normal contracted hours of five days per week.
The Supreme Court considered earlier cases, including Maconnachie [2002] and Yarrow [2007], which had suggested the 1/260th method. However, it appears that the 1/260th method should not apply to those whose pay is apportioned across all seven calendar days rather than only five working days.
Employers who wish to calculate a day's pay based on working days (the 1/260th method) rather than calendar days (the 1/365th method) should make express provision for this when drafting employment contracts and/or negotiating any relevant collective agreements.
Despite the above, there remains some uncertainty as to whether the decision in Hartley applies to the calculation of accrued statutory holiday entitlement on termination under the Working Time Regulations 1998 (WTR), namely the statutory entitlement of 5.6 weeks' annual leave.
Regulation 14 of the Working Time Regulations 1998 sets out a worker's entitlement to payment for accrued but untaken holiday on termination of employment. It provides that the entitlement is calculated either by applying the statutory formula:
(A × B) – C = D
Where:
A = the worker's annual leave entitlement;
B = the proportion of the leave year that has expired;
C = the leave already taken by the worker before termination; and
D = the accrued but untaken leave due on termination.
Alternatively, payment may be calculated in accordance with a relevant agreement, where one exists.
The calculation is therefore:
Annual salary × D (the number of accrued but untaken days' holiday from the start of the holiday year to the termination date), divided by either 260 (working days) or 365 (calendar days). Using the 1/365th calculation generally produces a lower payment.
The recent Employment Appeal Tribunal (EAT) decision in Connor v Chief Constable of South Yorkshire Police provides further guidance. Mr Connor's contract stated that, upon termination, accrued holiday pay would be calculated at 1/365th of his annual salary for each day's leave. However, had he actually taken the leave during his employment, he would have received his normal rate of pay. Mr Connor argued that the 1/365th calculation resulted in him receiving less than his normal pay for accrued holiday and therefore brought a claim before the Employment Tribunal for the shortfall.
The Employment Tribunal rejected Mr Connor's claim, holding that his holiday pay had been correctly calculated in accordance with the relevant agreement, namely his contract of employment. Mr Connor appealed.
The Employment Appeal Tribunal allowed the appeal. It held that paid annual leave serves an important health and safety purpose under both the Working Time Directive and the Working Time Regulations. Workers should receive their normal remuneration while on annual leave. If holiday pay were calculated at less than normal pay, workers could be discouraged from taking leave, thereby undermining the purpose of the legislation. Accordingly, the EAT concluded that any contractual calculation resulting in payment below normal pay would be inconsistent with the WTR.
A relevant agreement may alter the method of calculating accrued holiday pay, but only where the calculation remains consistent with the rights provided by the Working Time Regulations. It cannot provide for a payment that leaves the worker worse off than if they had been at work. Accordingly, for full-time employees working five days per week, the appropriate calculation is 1/260th of annual salary.
Employers are reminded that they must keep adequate records demonstrating compliance with the rules on holiday entitlement, holiday pay and payments in lieu of untaken holiday upon termination of employment. These records must be retained for six years. Failure to comply is a criminal offence and may result in unlimited fines.
This article is provided for informational and educational purposes only and should not be relied upon as legal advice. If you require any further assistance, please do not hesitate to contact our HR/Legal Advice Line on 01455 852 028.
