How to calculate a Daily Rate of Pay

The age-old question of how to calculate a daily rate of pay can becomes an issue where it is necessary to calculate holiday pay either during or at the end of the employment relationship and, with increasing regularity, where an employer seeks to withhold wages when an employee is taking industrial action particularly where the employee refuses to attend work as part of lawful strike action. The question to be determined is on what basis should the calculation be made as to what lawfully constitutes an accurate rate for a day’s pay.

For example, should the employer withhold 1/365th or 1/261th or some other fraction of an employee’s monthly/weekly/annual salary to get the correct daily accrual rate?

Generally, it is often the case that a standard contract of employment may contain wording along the lines of:

Calculation of holiday pay will often be made on the basis of a fraction of 1/261th  for a daily rate of pay.

This is effectively 365 days in the year (except for leap years) minus the 104 weekend days (i.e. 52 x 2 = 104). But is that equation always lawful? Certainly, from a contractual point of view – that is a clear and unequivocal express term. However, as with other areas of law – it is necessary to ask the question: is there any statutory rule which may “trump” that simple contractual provision?

Answer: Yes, there is!

The Apportionment Act 1870

Section 2 of the Act states:

“All rents, annuities, dividends, and other periodical payments in the nature of income… shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly.”

The use of the expression “from day to day” in this context means over the period of 365 days in a calendar year and the word “annuities” in the context of the Act includes salaries and pensions.

There is an exception to that general rule, section 7 of the Act provides that:

“The provisions of this Act shall not extend to any case in which it is or shall be expressly stipulated that no apportionment shall take place.”

Section 7 essentially provides that the Act will not apply if it is ‘expressly excluded from the contract of employment’.

Is the 1/261th calculation method lawful or unlawful?

The answer was given by the Supreme Court in the case of Hartley and Others v King Edward V1 College [2017] UKSC 39 which concerned the calculation of daily pay to be withheld from a teacher who had taken part in lawful strike action.

In summary, the key principles established in the Hartley case are as follows:

  1. If there is no express contractual provision in the contract of employment which clearly excludes the application of s.2 and 7 (and other sections) of the Apportionment Act 1870, then that Act will apply when considering any calculation to establish a daily rate of pay for particular purposes (such as the calculation for a deduction of wages for strike pay).
  2. It is possible for a contract to expressly exclude the statutory apportionment principle by directly stating that fact in the contractual terms.
  3. Examples of potentially valid and legitimate exceptions to the statutory apportionment principle are given at various places within the judgment using a form of words such as ‘No apportionment shall take place’.
  4. Any ambiguity in the contractual provisions relating to apportionment should be determined for the benefit of the employee rather than the employer.

It follows therefore that if there is no clear contractual exclusion of the Apportionment Act 1870 in your contracts of employment, the daily rate of pay should be calculated as per the provisions set out in the statute i.e., 1/365th of an employee’s annual salary.

Comment

Express exclusion of the Apportionment Act 1870 is necessary within contracts of employment if employers wish to calculate a daily rate of pay at 1/260th. As such, employers should review their contracts of employment, handbooks and holiday pay policies to check what fraction of daily rate of pay is stated. If there is no clear contractual exclusion of the statute, then employers should consider amending their contracts of employment to address the points raised by the Supreme Court in the Hartley case.

We can assist with the updating or amending of your contracts of employment if this is an issue for you.

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