We'd like to remind Forumites to please avoid political debate on the Forum... Read More »
Retrospective change in terms of a employment contract
vcuk23
Posts: 6 Forumite
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.
When I started working at my Company, all employees on secondment (like me) were paid a Net wage. The reason for this was - if any employee left 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 Net-Monthly-Pay/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 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 approximately 79% of their daily rate. (£79 per day, instead of £100 per day)
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?
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.
When I started working at my Company, all employees on secondment (like me) were paid a Net wage. The reason for this was - if any employee left 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 Net-Monthly-Pay/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 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 approximately 79% of their daily rate. (£79 per day, instead of £100 per day)
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?
0
Comments
-
I think you will probably need to pay us to read that lot. Perhaps you could be more concise.0
-
You have no alternative other than to take detailed legal advice - which may be difficult to find and somewhat expensive. Given that this is a "secondment" then the legal jurisdiction is not clear. You cannot depend on any advice that you get on a free site. And despite sympathy with Mistrals comment - less information isn't helpful because actually it needs more. A lot more. You need a lawyer.0
-
Well, I would say thank you very much and book the 100 days off. How would they cope if lots of you did that?But a banker, engaged at enormous expense,Had the whole of their cash in his care.
Lewis Carroll0 -
theoretica wrote: »Well, I would say thank you very much and book the 100 days off. How would they cope if lots of you did that?
Which is exactly why they need legal advice. In UK jurisdiction, 100 days leave owed might be possible - but you can't ever expect to see it or the money! If they were formerly not under UK jurisdiction, then the law can't go "backwards" either.0 -
just one point, if the gross salary is £34500 (which does equate back to £2200 per month assuming normal UK tax allowance circa £10K, why is 40% being deducted from the backdated holiday pay?
Edit: If there is £10K Personal tax allowance in the calculation, then the net salary based on the £13K encashment does come pretty close to the £10K in lieu of holidays if it had been paid under the net route - so it makes sense under those circumstances I'd take it and run myself!
(ignoring the obvious about UK and holiday allowances...)0 -
Mistral001 wrote: »I think you will probably need to pay us to read that lot. Perhaps you could be more concise.
You are right - I could, but people would then ask questions and I would then have to provide all the additional details in bits and pieces, across multiple posts. I personally thought it would serve the purpose to put all the details in one single place. But I do get your point.0 -
theoretica wrote: »Well, I would say thank you very much and book the 100 days off. How would they cope if lots of you did that?
Leave has to be approved by the Manager, so obviously that is not an option. Secondly, if we were asked to work overtime with TOIL being the only option, most of us would not opted to put in the extra hours. It was only because we stood to gain monetarily that we agreed to it.0 -
just one point, if the gross salary is £34500 (which does equate back to £2200 per month assuming normal UK tax allowance circa £10K, why is 40% being deducted from the backdated holiday pay?
Edit: If there is £10K Personal tax allowance in the calculation, then the net salary based on the £13K encashment does come pretty close to the £10K in lieu of holidays if it had been paid under the net route - so it makes sense under those circumstances I'd take it and run myself!
(ignoring the obvious about UK and holiday allowances...)
Can you please elaborate of this part "If there is £10K Personal tax allowance in the calculation"
We end up paying 40% tax on the holiday pay, as this amount is paid at the end of the financial year. By this time, the gross pay for most employees has crossed the 40K threshold. So any income beyond that is taxed at 40%0 -
I agree that you need to speak to an experienced employment lawyer.
Factors which may be relevant are :
- what country is the parent firm based in?
- do your (original) contracts specify the jurisdiction under which any dispute should be dealt with? ( a lawyer may, once they have seen your employment contract and learned more about your job, be able to tell you whether or not any agreement about jurisdiction holds water)
I *suspect* that one critical factor will be whether you are considered to be UK based or not - if you are seconded to the UK but actually employed, paid, and pay taxes elsewhere then English law may not be what applies.
It looks to me, at first glance, as though they *may* have discovered that the old contracts may be inconsistent with employment or tax law here, and that that has led to the change.All posts are my personal opinion, not formal advice Always get proper, professional advice (particularly about anything legal!)0 -
I agree that you need to speak to an experienced employment lawyer.
I *suspect* that one critical factor will be whether you are considered to be UK based or not - if you are seconded to the UK but actually employed, paid, and pay taxes elsewhere then English law may not be what applies.
To answer this part of your questions, we were all:
1. Paid a UK salary, not an allowance
2. We paid taxes in UK, and also got a P-60 with the full amount shown as being taxed in UK.
3. No money was paid at off shore (parent company country) and the salary was fully paid in UK0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 349.8K Banking & Borrowing
- 252.6K Reduce Debt & Boost Income
- 453K Spending & Discounts
- 242.7K Work, Benefits & Business
- 619.5K Mortgages, Homes & Bills
- 176.3K Life & Family
- 255.6K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.1K Discuss & Feedback
- 15.1K Coronavirus Support Boards