The EAT decision in Lloyd v. Elmhurst School Limited [2022] highlights the strict interpretation of "basic hours" under the National Minimum Wage Regulations 2015. We explore the judgment below.

Background

All workers are entitled to be paid at least the National Minimum Wage (NMW) for time worked. Amongst other objectives, this seeks to be a keystone in preventing modern slavery. Non-compliance with the legislation, the National Minimum Wage Regulations 2015 (the Regulations), carries criminal as well as civil sanctions. Therefore, compliance is crucial for employers.

The Regulations provide that:

• the NMW must be calculated in respect of the worker's "pay reference period";
• a pay reference period is one month or, if shorter, the period of time by reference to which a worker is paid (e.g. a week);
• those performing "salaried hours work" are entitled to be paid the NMW in respect of their "basic hours" for the year, which must be specified in or ascertainable from their contract;
• where the pay reference period is a month, the hours of salaried hours work in that period are the basic hours divided by 12; and
• salaried workers must be paid in equal weekly/monthly instalments, or monthly instalments that vary but result in the worker receiving an equal amount each quarter.

Facts

The Claimant, Ms Lloyd, was employed as a part-time learning support assistant. She worked three days a week during term time and was paid a salary in equal monthly instalments. She only ever carried out work during school terms. Her contract did not contain any provisions related to specific hours of work, salary or her rate of pay for school holidays. It did, however, stipulate that she was entitled to the "usual school holidays" as "holidays with pay".

The Claimant brought a claim to the Employment Tribunal (ET) for unlawful deduction from wages under the Employment Rights Act 1996, as she believed that she had been paid less than the NMW.

The Claimant argued that her basic hours should be calculated over a period of 52 weeks and, as she was entitled to "the usual school holidays as holidays with pay", her basic hours included the 12 weeks of school holiday. The Respondent argued that the correct period was 40 weeks, being the 36 weeks she actually worked plus four weeks' prorated statutory annual leave entitlement.

ET decision

The ET accepted that the Claimant was a term-time salaried worker and that her pay reference period was one month. The issue was in respect of what time should count during the pay reference period and, more specifically, whether her basic hours should be calculated over 52 weeks or 40 weeks.

Focusing on the practical reality of the Claimant's working hours, the ET found in favour of the employer, holding that the Claimant's basic hours were the hours worked during the 40 weeks actually worked (inclusive of her statutory annual leave entitlement). The ET held that the additional 12 weeks' annual leave did not form part of her basic hours as there was no working activity during that time and thus it need not be paid at the same rate as statutory annual leave. Furthermore, for the purpose of the NMW, a holiday is a holiday from a day on which an employee would otherwise be working – in this instance, the Claimant would not be.

At the Employment Appeal Tribunal (EAT), the Claimant appealed the decision, arguing that the ET incorrectly focused on the hours she actually worked, rather than her employment contract as stipulated in the Regulations, in order to determine her basic hours.

EAT decision

The EAT allowed the appeal with a number of key findings:

• basic hours under the Regulations derive from contract, not hours actually worked. The ET had erroneously focused on hours actually worked;
• basic hours can include hours that are non-working hours , such as notional hours attributable to periods of contractual holiday; and
• in respect of salaried workers, absences from work need not be absences from days they would otherwise be working. Periods of absence which count towards basic hours are not restricted to absences for a period that would otherwise be worked.

The specific wording of the Claimant's contract was key as it entitled her to "holidays with pay ", which led the EAT to conclude that school holidays formed part of her basic hours, even though this was unlikely to have been the employer's intention when drafting the contract. The EAT held that the Claimant's correct statutory holiday entitlement was 5.6 weeks, not 4 weeks, in line with Brazel v. The Harpur Trust, in which the Supreme Court held that employees who only work for part of the year (e.g. term-time workers) are entitled to 5.6 weeks of paid holiday just like employees who work all year round.

What does this mean for me?

The EAT's decision clarifies that, when determining what constitutes basic hours under the Regulations, it is the employment contract that must be referred to and not the actual hours worked. It further confirms that periods of absence from work can count towards basic hours, even if they are not absences from a period when the individual would otherwise be working. Employers should take extra care when drafting working hours, salary and annual leave clauses in contracts in order to be clear about basic hours and avoid such issues arising.

If you have any queries regarding minimum wage payments or construction of employment contracts, please do not hesitate to contact us and we would be glad to advise you.