The Contract is King! A Timely Reminder to Get Your Contracts in Order and Avoid Unlawful Deductions Claims
2023-05-25In a nutshell:
A recent case sheds light on the pitfalls of badly drafted contracts for TTO staff when it comes to meeting National Minimum Wage (NMW) requirements. The case held that the NMW wage was payable for weekly hours throughout the year, including all school holidays (16 weeks), despite this including hours which were not actually absences from a period when the claimant would otherwise have been working.
The bigger picture:
Earlier this year the Employment Appeal Tribunal held, in the case of Lloyd v Elmhurst School Ltd, that a part-time learning support assistant was entitled to be paid the national minimum wage (NMW) for her ‘basic hours’ calculated over a 52 week period, including during all the school holidays, not just those weeks equating to her term-time working hours and pro-rata annual leave entitlement.
Ms. Lloyd worked three days a week (21 hours) at Elmhurst School during term-time and was paid in twelve equal monthly instalments. There was no clause in her contract that dealt expressly with hours of work. Instead, the contract stated “during term time [her] duties must be personally attended to during such hours, including out of school hours, as the CEO and/or Head Teacher may reasonably direct”. Crucially, it also stated that she was “entitled to the usual school holidays as holidays with pay.”
Ms. Lloyd brought a claim against Elmhurst School for unlawful deduction from wages, arguing she had been paid below the level of the NMW. In particular Ms. Lloyd alleged that she should have been paid at least the NMW based on an average hourly rate calculated according to her annual salary divided by her annual ‘basic hours’. As a salaried hours worker for NMW purposes, she argued that her ‘basic hours’ should be calculated over a period of 52 weeks (including all the school holidays). In other words Ms. Lloyd said that her basic hours for NMW purposes should be: 21 x 52 = 1,092. Her annual salary was £8,568. Producing an hourly rate of £8,568 ÷ 1,092 = £7.85 per hour (below the NMW rate at that time). She claimed this was an unlawful deduction from her wages.
On the other hand, whilst the School accepted that Ms. Lloyd was engaged in “salaried hours work” (in that she was paid an annual salary, in equal instalments, for a basic number of hours) it argued that her hourly rate for NMW purposes should be calculated based on 40 weeks of the year, which included the 36 weeks she worked during term time and four weeks of statutory paid holiday. The school calculation is this:
Annual salary of £8,568 ÷ 840 hours (40 weeks x 21 hours) = £10.20 (well above the NMW at that time).
Notably, (and as the eagle-eyed amongst you will have spotted!) the payment of only four weeks’ holiday was wrong (following Harpur Trust v Brazel). It was accepted by the School at the appeal that Ms. Lloyd was actually entitled to 5.6 weeks’ leave. Taking this into account, the School argued that her hourly rate for NMW purposes was therefore:
Annual salary of £8,568 ÷ 873.6 hours (41.6 weeks x 21 hours) = £9.81 (still above the NMW rate at that time).
The School argued it was never its intention to pay Ms. Lloyd for the entire school holidays and both parties were aware that Ms. Lloyd worked term-time only and, as such, with the exception of her statutory holiday entitlement, the period during the school holidays did not count as ‘basic hours’ for NMW purposes.
The issue for the EAT was what made up her ‘basic hours’ and, in particular, whether these included hours during all the school holidays and not just her statutory holiday entitlement.
The EAT found in Ms. Lloyd’s favour, holding that her ‘basic hours’ derived solely from the wording in her contract of employment and could include hours which were not working hours because her contract contained the right to take all school holidays as holiday with pay. The tribunal had been wrong to focus on the weeks Ms. Lloyd actually worked (or was on annual leave from those working hours) rather than correctly interpreting her employment contract to determine her basic hours. Her periods of absence from work during the entirety of the school holidays (not just during her pro-rated annual leave entitlement) counted as ‘basic hours’ for salaried hours work even though they were not absences from a period when she would otherwise have been working. These hours for each week throughout the 52 weeks of the years were therefore her annual basic hours and were held to be the correct denominator in calculating her hourly rate for NMW purposes.
Based on Ms. Lloyd’s successful arguments her hourly rate for NMW purposes should be as follows:
Annual salary of £8,568 ÷ 1,092 hours (52 weeks x 21 hours) = £7.85 (below the NMW rate at that time).
The EAT remitted this case to a different employment tribunal to determine Ms. Lloyd’s actual ‘basic hours’, and the tribunal's decision is awaited.
Why is this important?
Well, obviously, Ms. Lloyd was successful in her arguments and accordingly won her claim for unlawful deduction from wages.
This case is really a lesson in getting the contractual wording right in order to determine basic hours for salaried workers, and accordingly to calculate whether the NMW has been correctly paid. The EAT’s decision highlights the importance of ensuring that an employee’s contract of employment contains clear contractual terms that reflect the intentions of the parties with regard to ‘basic hours’ of work. For NMW purposes, for a salaried worker, ‘basic hours’ are determined solely in accordance with the contractual provisions. This is so even if a contract doesn’t accurately reflect the parties’ intentions or actual working practices, ultimately those factors are irrelevant: The contract is king!
What next?
It is important that schools ensure that their contracts of employment for term-time staff are detailed and precise. In Ms Lloyd’s case, the wording of the clause in her contract was key to the EAT’s analysis of how her basic hours must be determined. It is important to expressly distinguish between school holiday periods and contractual entitlements to paid holiday to avoid a situation where a worker’s basic hours could be calculated over a period of 52 weeks, running the obvious risk of falling foul of the NMW Regulations and an unlawful dismissal claim succeeding. The EAT was clear that if basic hours, for the purpose of determining NMW, only included hours attributable to absences from what would otherwise be work, this would have been spelt out in the NMW Regulations; it wasn’t and therefore such hours will be included UNLESS expressly excluded by reference to the contractual terms.
