Tricky issues for employers calculating a week’s pay
Identifying a week’s pay is necessary when calculating holiday pay, statutory redundancy pay, notice pay or the basic award for an unfair dismissal claim. Where the employee works normal working hours and their remuneration does not vary this is not an onerous or complicated task.
There are, however, circumstances where an employee’s remuneration varies depending on the hours they work, for example where they work under a shift pattern. According to the Employment Rights Act 1996 section 221(3) if an employee’s remuneration varies with the amount of work completed, the amount of a week’s pay is calculated using the average hourly rate of pay from the preceding twelve-week period (or, in the case of holiday pay, now 52 weeks).
In these situations, before an employer can calculate an employee’s weekly pay, they must first consider what the employee’s normal working hours were over that twelve or 52-week period and what constituted their pay for those hours.
What are normal working hours?
Documenting working hours
In most cases, the normal working hours will be set out in an employee’s contract of employment. Yet those with long service records whose working hours have evolved undocumented over time, or those who complete work on a shift pattern often don’t have these details set out in one single document. In Smith and ors -vs- Chubb Security Personnel Ltd the employee’s contract of employment specified that their working hours were “detailed in the duty roster”. The employer believed that they were contractually obliged to provide work to the employee for 4-hours per week but the duty roster suggested that over a twelve-week period the actual working hours completed by the employee were closer to 56-hours per week. This miscalculation resulted in the statutory redundancy figure being substantially increased.
Employers should therefore be careful not to rely solely on an employee’s contract of employment when seeking to determine their normal working hours. There are other documents such as rosters, shift patterns, policies, employee agreements and client need’s that should be reviewed alongside contracts of employment when seeking to determine what hours of work an employee is actually undertaking.
Whether or not overtime should be considered when calculating an employee’s normal working hours will depend on the contractual arrangements in place. It is largely accepted that guaranteed compulsory overtime (i.e. overtime that employers must offer to employees in certain circumstances and employees must accept in return) should be included within the calculation, whilst voluntary overtime should not.
It is, however, entirely possible for longstanding voluntary overtime arrangements to become contractual, and therefore included within the calculation, by virtue of the fact that they become an implied term of the employee’s contract of employment. This was the case in Crute -vs- Cape Insulation Co Ltd where several lorry drivers, who were contractually obliged to work for a minimum of 39-hours per week, were found to be working closer to 60-hours per week. To make matters more complicated, the lorry drivers were being paid for a 12-hour per day shift by the employer even though on some days the drivers finished their shifts early. The Employment Tribunal held that the employer had become contractually bound to the 60-hours per week working hours because of the longstanding agreement and remuneration payments that had been made. Accordingly, for the purposes of the week’s pay calculation the normal working hours were deemed to be 60-hours per week.
What counts towards pay?
The Employment Rights Act 1996 stipulates that only contractual bonus payments should be treated as pay for the purposes of calculating a week’s pay. The Employment Tribunal took this a step further in Mole Mining Ltd -vs- Jenkins and held that a shift bonus should be included because (1) it was paid at an agreed rate; and (2) it was paid as part of the employee’s wages. Accordingly, the case is relatively simple where a bonus payment amount is expressly agreed between an employee and employer and the employee receives the money via payroll.
It is not uncommon for organisations to make ‘discretionary’ bonus payments to employees, particularly at Christmas. Employers should be aware that simply labelling a bonus payment as ‘discretionary’ doesn’t automatically exclude it from being included within the calculation. Indeed, an employee will likely have a strong argument for its inclusion where the bonus has been paid annually to eligible employees through payroll across concurrent years.
Benefits in Kind
In the current job market, employers have become increasingly creative in finding new ways to attract and retain top talent, be it offering company cars, car allowances, private health care or life assurance. Whilst the general principle is that these types of benefits in kind are not to be included in a week’s pay calculation, there are examples of where it may be appropriate to do so, for instance where the employee pays for the benefit either directly or indirectly.
Calculating the weekly pay of an employee can be a complicated task. There are many different factors to consider when seeking to establish an employee’s normal working hours and remuneration over a twelve-week period. Any miscalculation can have costly consequences for employers as they may find themselves not only defending an Employment Tribunal claim but liable for substantially enhanced amounts of pay or backpay.
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