COMPLIANCE
Annual leave and term-time workers
SudeepGanguli, employment taxes senior manager at PSTAX , discusses some employment taxes issues relating to the annual leave entitlement of term- time only school staff
F ollowing a multi-million pounds settlement made to its term- time only employees by Royal Borough of Greenwich in 2018, several local authorities have recently recognised that their calculation of annual leave entitlement for term-time only staff has been incorrect. This was because it was assumed that the leave entitlement only accrued during term time and not across the full year. Consequently, many councils have not only changed their calculation methodology to that agreed between the unions and employers but are now facing claims by affected staff (supported by the trades unions) seeking retrospective pay to account for the holiday entitlement shortfall. Some larger local authorities employ thousands of term-time only staff, mainly in schools, so the potential settlements are likely to be substantial at a time when budgets are already under enormous pressure. The problem stemmed from the fact that that the law was not clear on the employment status of term-time staff, as they were not considered to be part-time or full-time staff. Term-time workers do have continuous employment, so cannot claim ‘out of work’ benefits, but they are able to claim in-work benefits. In addition, across the country there have been many different term-time contract options for holiday entitlement. There has been a general lack of consistency and potentially
unlawful employment practices. To illustrate the issue under
● entitlement to receive interest payments ● whether any element relates to injury to feelings caused by what may be perceived as discrimination against term- time workers (of which a high percentage are female) ● impact of the Limitations Act 1980 on the number of years included in the settlement. In terms of the income tax and National Insurance contributions (NICs) implications, there is long-established precedent that employer payments to employees in respect of any contractual entitlement must be treated as earnings and subject to tax and class 1 (employee and employer) NICs. An employee’s right to holiday and holiday pay arises from the contract of employment so payments of such, even when wrapped up within a COT3 settlement agreement, are taxable earnings and subject to class 1 NICs. However, it should be pointed out that if the settlement includes an element of compensation being considered over and above the actual financial loss and the excess payments relate to an element of ‘compensation for hurt feelings’, then potentially this element of the settlement could be paid free of tax/NICs (see Moorthy v Revenue and Customs Commissioners [2018] EWCA Civ 847). Great care should be taken in any case where an employer considers that a payment might not be subject to tax/NICs, and it is recommended that legal advice is taken to establish if there has been any element of ‘discrimination’ involved that merits a ‘hurt feelings’ payment. Appropriate tax advice should also be sought to consider the specific
consideration, the term-time entitlement calculation used by Royal Borough of Greenwich previously was as follows: ● 39 (term time weeks worked) ÷ 52.179 (full year weeks worked plus annual leave and bank holidays) × 31 days = 23.7 days. However, as a result of the out-of-court settlement the following formula was then agreed: ● 39 (term time weeks worked) ÷ 44.4 (full-time weeks worked (this figure is the weeks worked by a year-round employee, so 52 weeks less 7.6 weeks leave)) × 31 days = 27.2 days. (Clarification: see below.) The ruling also resulted in the Local Government Association updating its guidance in 2018 accordingly and this is the approach that now should be adopted in calculating the leave entitlement for this group of workers. Regarding the issue of compensating term-time staff for potentially six years of underpayments, we are aware of a few cases where discussions have been taking place – and continue to take place – with union representatives and council employers. In many cases the payments are being made via a ‘COT3’ process. The mechanics for calculating a settlement are complicated and would need to consider the following: ● financial loss ● pension detriment
Clarification The divisor of 44.4 used in the calculations for the purpose of the out-of-court settlement of the case involving the Royal Borough of Greenwich was agreed by the parties. The calculation (and divisor) should not be construed as an appropriate calculation methodology for general purposes.
| Professional in Payroll, Pensions and Reward | October 2020 | Issue 64 30
Made with FlippingBook - Online magazine maker