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For the first 15 years, my Company had a leave policy that allowed the employees to carry-forward annual leaves indefinitely. Employees working at client locations, who are billed for by the Company for every working day, were encouraged and even coerced to make up for Annual Leaves taken by working overtime. This Overtime was not paid in cash - instead, these were deducted from their Annual Leaves. This meant the Annual Leaves kept building up, and employees did not mind as the Annual Leaves would be encashed at the end of their tenure.
The Company has now changed the Leave Encashment policy, and according to the new policy, employees would receive about 25% less than what their leaves were actually worth. Is this legal?
Detailed description
My question is related to the legality of a change in terms of an employment contract that has been retrospectively applied.
The Company that I work for is an overseas company with a UK branch. So most of its employees in UK are on secondment from the parent company. However, all employees are paid a UK salary and pay taxes in UK, with no allowance/salary paid overseas.
When I started working at my Company, all employees on secondment (like me) were paid a Net salary. The reason for this was - if any employee left UK in the first half of a tax year, he/she would be liable to pay tax overseas and therefore the Company was able to reclaim the tax paid in UK without having to pass this on to the employee. During this time, the Company had a Leave policy that stated :
1. Annual leaves could be accumulated and carried over indefinitely
2. Annual leaves could only be encashed either at the end of secondment to UK branch, or when an employee quit the company.
3. When Annual leaves were encashed, each day of leave would be payable at the Net Daily Rate (calculated as NetMonthlyPay/22 days). This meant that the tax liabilty of the leave encashment rested with the Company.
After about 7-8 years of my employment, the Company changed the contract of all employees on secondment and signed them up as UK employees. The new terms of employment stated that :
1. Employees were now paid a Gross salary, which was arrived at on the basis of their old Net salary.
2. Only a fixed number of Annual leaves could be carried forward to the next year with a maximum of 5 Annual leaves being encashable each year.
3. Annual Leaves would now be encashable at rate of Gross salary - meaning that for every leave encashed, the employee would be liable to pay tax.
4. All leaves that were carried forward from the old contract were termed "OLD Leaves" and treated differently. The employees were given the option of using up these OLD Leaves in the next 12 months, failing which the OLD Leaves would be encashed according to the new leave policy.
The problem with the last item above is - employees end up receiving considerably less that what they would have received as per the old leave encashment policy. The difference is approximately 21%. Employees like myself who were on secondment for more than 6 years stand to lose substantially.
To quote a few numbers, consider a Net Monthly salary of £2200 (Gross Annual Salary of £34,500) This equates to a Net Daily Rate of £100 per day.
Old Policy : An employee having a leave balance of 100 days should receive £10,000 as Leave encashment without having to pay tax.
New Policy: An employee having a leave balance of 100 days will receive £7961 as Leave encashment after having to pay tax on the gross amount. The Gross amount of Leave encashment comes to £13269 and the employee pays 40% tax on this.
So by introducing the new leave policy and applying it to leaves accumulated before the introduction of this policy, the Company has reduced it's own tax liabilty and passed it on to its employees.
In the calculation above, 100 annual leaves might sound like an exaggerated number - but it is not.
There is also a background to how and why many employees have such a large number of accrued leaves. Most of the employees work at client locations, where every leave taken by an employee meant loss of revenue to the Company. So the management encouraged (even coerced) employees to work overtime to make up time for the ones who were on leave. This overtime was not paid in cash. Instead, employees working these extra hours were asked to take TOIL (Time Off In Lieu) when they wished to go on their Annual Leaves. This meant that employees could effectively go on Annual leave without actually availing of any of their Annual Leave balance, as they had already worked extra hours to cover the time that they were taking off, and the whole Annual Leave duration was taken as TOIL. The reasoning provided by the Management at that time was that by saving up their leaves, the employees were in effect being paid a day's wage, although it would be paid at a later date.
With the new policy coming into force, this is no longer true and the employees would effectively end up being paid at 80% of their daily rate for whatever days they worked Overtime over the last 8 years.
So, my first question to the legal experts on this forum is:
1. Is it legal for a Company to apply policy changes retrospectively in this manner? To a layman like me, it does seem unreasonable to ask employees to work under certain terms and then change those terms before they are paid for that work. The logical approach would seem to pay off any Old leaves as per the old policy, and apply the new rules to leaves accrued from the date the policy came into effect. So is the Company breaking any employment laws by doing this?
2. If this is not legal, what policy/law/section is it violating?
3. What is the best thing for the employees to do under these circumstances?
Thanks in advance.
For the first 15 years, my Company had a leave policy that allowed the employees to carry-forward annual leaves indefinitely. Employees working at client locations, who are billed for by the Company for every working day, were encouraged and even coerced to make up for Annual Leaves taken by working overtime. This Overtime was not paid in cash - instead, these were deducted from their Annual Leaves. This meant the Annual Leaves kept building up, and employees did not mind as the Annual Leaves would be encashed at the end of their tenure.
The Company has now changed the Leave Encashment policy, and according to the new policy, employees would receive about 25% less than what their leaves were actually worth. Is this legal?
Detailed description
My question is related to the legality of a change in terms of an employment contract that has been retrospectively applied.
The Company that I work for is an overseas company with a UK branch. So most of its employees in UK are on secondment from the parent company. However, all employees are paid a UK salary and pay taxes in UK, with no allowance/salary paid overseas.
When I started working at my Company, all employees on secondment (like me) were paid a Net salary. The reason for this was - if any employee left UK in the first half of a tax year, he/she would be liable to pay tax overseas and therefore the Company was able to reclaim the tax paid in UK without having to pass this on to the employee. During this time, the Company had a Leave policy that stated :
1. Annual leaves could be accumulated and carried over indefinitely
2. Annual leaves could only be encashed either at the end of secondment to UK branch, or when an employee quit the company.
3. When Annual leaves were encashed, each day of leave would be payable at the Net Daily Rate (calculated as NetMonthlyPay/22 days). This meant that the tax liabilty of the leave encashment rested with the Company.
After about 7-8 years of my employment, the Company changed the contract of all employees on secondment and signed them up as UK employees. The new terms of employment stated that :
1. Employees were now paid a Gross salary, which was arrived at on the basis of their old Net salary.
2. Only a fixed number of Annual leaves could be carried forward to the next year with a maximum of 5 Annual leaves being encashable each year.
3. Annual Leaves would now be encashable at rate of Gross salary - meaning that for every leave encashed, the employee would be liable to pay tax.
4. All leaves that were carried forward from the old contract were termed "OLD Leaves" and treated differently. The employees were given the option of using up these OLD Leaves in the next 12 months, failing which the OLD Leaves would be encashed according to the new leave policy.
The problem with the last item above is - employees end up receiving considerably less that what they would have received as per the old leave encashment policy. The difference is approximately 21%. Employees like myself who were on secondment for more than 6 years stand to lose substantially.
To quote a few numbers, consider a Net Monthly salary of £2200 (Gross Annual Salary of £34,500) This equates to a Net Daily Rate of £100 per day.
Old Policy : An employee having a leave balance of 100 days should receive £10,000 as Leave encashment without having to pay tax.
New Policy: An employee having a leave balance of 100 days will receive £7961 as Leave encashment after having to pay tax on the gross amount. The Gross amount of Leave encashment comes to £13269 and the employee pays 40% tax on this.
So by introducing the new leave policy and applying it to leaves accumulated before the introduction of this policy, the Company has reduced it's own tax liabilty and passed it on to its employees.
In the calculation above, 100 annual leaves might sound like an exaggerated number - but it is not.
There is also a background to how and why many employees have such a large number of accrued leaves. Most of the employees work at client locations, where every leave taken by an employee meant loss of revenue to the Company. So the management encouraged (even coerced) employees to work overtime to make up time for the ones who were on leave. This overtime was not paid in cash. Instead, employees working these extra hours were asked to take TOIL (Time Off In Lieu) when they wished to go on their Annual Leaves. This meant that employees could effectively go on Annual leave without actually availing of any of their Annual Leave balance, as they had already worked extra hours to cover the time that they were taking off, and the whole Annual Leave duration was taken as TOIL. The reasoning provided by the Management at that time was that by saving up their leaves, the employees were in effect being paid a day's wage, although it would be paid at a later date.
With the new policy coming into force, this is no longer true and the employees would effectively end up being paid at 80% of their daily rate for whatever days they worked Overtime over the last 8 years.
So, my first question to the legal experts on this forum is:
1. Is it legal for a Company to apply policy changes retrospectively in this manner? To a layman like me, it does seem unreasonable to ask employees to work under certain terms and then change those terms before they are paid for that work. The logical approach would seem to pay off any Old leaves as per the old policy, and apply the new rules to leaves accrued from the date the policy came into effect. So is the Company breaking any employment laws by doing this?
2. If this is not legal, what policy/law/section is it violating?
3. What is the best thing for the employees to do under these circumstances?
Thanks in advance.
