Term-time worker entitled to National Minimum Wage for 52 weeks
Schools and colleges employ staff on term-time only contracts to reduce their payroll costs. The vast majority agree to work during term-time (generally around 39 weeks a year in the state sector) and are paid a pro-rated salary to reflect this, which is then divided by 12 and paid monthly. Employees like this arrangement because it means they receive a regular wage, even when they are not required to work. It's also administratively convenient for employers.
Under the National Minimum Wage Regulations, workers must receive the NMW for the hours they work in a 'relevant pay period' (how often they are paid). To avoid HMRC concluding that term-time workers have been underpaid during their periods of work, their contracts have to comply with the detailed rules about salaried hours workers.
In Lloyd v Elmhurst School Ltd, the EAT had to decide if a teaching assistant whose contract didn't set out the number of hours she was required to work, and contained a clause which said she was 'entitled to the usual school holidays as holidays with pay', had been underpaid because she only received four weeks holiday pay.
Ms Lloyd started working for the Elmhurst private school in 2009. The parties agreed that she would work term-time only and that she would be paid for 40 weeks a year (which included four weeks' holiday) payable in twelve monthly instalments. However, the contract terms did not accurately reflect that agreement. It stated that Ms Lloyd:
- 'may be required to work for varying short periods at the end and before the beginning of term'
- 'was entitled to the usual school holidays as holidays with pay'
Ms Lloyd worked under that arrangement for a number of years. However, for reasons that aren't explained, she later brought a tribunal claim arguing that she was entitled to be paid for each week of the school holidays in accordance with her contract and, therefore, hadn't received the NMW. The school argued that it had paid her correctly and that her salary exceeded the NMW.
The tribunal dismissed her claim and said that her 'basic hours' were based on 21 hours over 40 weeks which comprised the 36 hours she worked during term-time and four weeks leave. That was the arrangement agreed between the parties, albeit not reflected in the contract. Ms Lloyd appealed.
Decision of the EAT
The parties agreed that Ms Lloyd was engaged on a salaried hours contract and the EAT proceeded on that basis. The key question it had to determine was whether the tribunal had properly interpreted the rules that applied to working out the 'basic hours' of a salaried hours worker.
The EAT said that the tribunal had got this wrong. The relevant provisions of the NMW Regulations (21(3)) don't refer to working hours at all - but to 'basic hours'. And these can include contractual hours which the worker doesn't have to work as well as, paid contractual holiday.
Ms Lloyd's basic hours had to be ascertained from her contract - not from the number of hours she actually worked. Her contract clearly stated that she was entitled to be paid during the 'usual school holidays'. The court couldn't imply a term into the contract that the reference to paid holiday was limited to the amount of holiday she was entitled to under the Working Time Regulations 1998 and how much she had received.
By not paying her for all of those holiday weeks, the claimant’s pay for her 'basic hours' fell below NMW rates.
The EAT remitted the claim back to the tribunal to determine how much Ms Lloyd had been underpaid.
It's interesting that, prior to Ms Lloyd's tribunal claim, HMRC had investigated the school. It found that term-time staff at the school were paid for a 40 week period and that the school hadn't underpaid them. HMRC's findings aren't binding on an employment tribunal (or appeal courts) and, the EAT disregarded them here.
I am surprised that HMRC ruled in favour of the school. The contracts it reviewed all included the same holiday pay clause as the one in question in this case (which the school removed shortly afterwards). This decision suggests that HMRC got it wrong here.
Implications for other employers
Although this case involved a term-time worker, the decision extends beyond these types of arrangements. Some employers with seasonal peaks and troughs elect to average the pay of their staff over a 12 month (or shorter) period to help staff budget. It is possible to do this without breaching the NMW Regulation's provided staff are engaged on salaried hours contracts. However, if they are paid by reference to the number of hours worked (time work) they must receive the NMW rate for the actual number of hours they have worked in each specific pay reference period, and employers will be deemed to have underpaid staff even if they receive the appropriate NMW rate over the entire period.
This caught out John Lewis a few years ago. Following an investigation by HMRC, it announced that it had put aside £36 million to compensate hourly paid staff whose pay had been annualised to provide them with a steady and reliable income over the year.
How to draft a salaried hours contract
Paying someone a salary isn't enough, in itself, to treat a worker as performing salaried hours for NMW purposes. For the workers to be doing salaried hours work, all of these conditions have to be met:
- they are paid under their contract for an ascertainable basic number of hours per year
- they are entitled to an annual salary for those hours
- they aren't entitled to any other payment for those ascertainable basic hours except a performance bonus or salary premium, and
- they are paid either in equal instalments which are monthly, weekly, twice-weekly, four-weekly or varying monthly instalments which result in the worker being paid in equal amounts each quarter.
All of these requirements should be clearly set out in the contract.
Tips for schools and colleges
1. If you are going to divide workers’ pay into 12 equal monthly instalments, you must have a salaried contract in place.
2. If someone working under a salaried hours contracts works in excess of their basic hours, they should receive additional pay for those hours. This means that employers must keep a record of the actual hours worked (or deemed to have been worked).
3. Pay should not fall below the NMW for both actual hours worked and contractual pay commitments.
4. You should distinguish between paid holiday and school holidays for which employees neither work nor are paid. During school holidays, you only need to pay staff for their actual holiday entitlement rather than for the entire break and you should set this out clearly in the contract to avoid confusion.
5. As this school discovered, you can't defend this type of claim by saying that you've properly paid staff for the weeks they have worked, if their contracts give them the right to be paid for time when they aren't required to work.
How we can help
We regularly advise employers about how to avoid underpaying staff whose hours vary significantly, or don't work all year round. We recommend that you make sure that your contracts are up to scratch and don't expose you to both employment claims and HMRC penalties (which can be as high as £20,000). Please contact Glenn Hayes for advice.
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