I have recently left my company's employ and have been astounded at the method which was used to calculate my final pay.

The approach used by my former employer varies gross pay according to the month of leaving based on the number of working days in that month. The same number of days worked in May for example will equate to a different final pay than had I left in June 2008 (May having 22 weekdays and June 21) HOWEVER, hourly overtime rates used are static and not dependant upon month accrued or paid (annual salary / 52 weeks of year / 35 paid working hours of week).

Please could anyone offer any advice or guidance, as in my opinion this is creative accounting and a HR cost cutting bid. I have worked out that my former employers method works out in their favour for 7 month of the year for 2008 and prehaps more crucially, 2 of which are the months the company experiences its highest turnover of staff.

How would you calcualte gross final pay for an illustrative salry of £12K p/a and a leaving date of 12th May 2008???

My previous employer would calculate this to be £363.64 Gross although I believe the figure should be £369.23 Gross. It only a matter of a few pounds but multiplied by a number of staff is a significant cost avoidance (bearing in mind ER NI and pension liabilities etc are based on amounts paid!).

Any comments would be much appreciated. I have attached calculation details below should you be interested.

Many thanks in advance.

Terry.

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CALCULATION METHODS

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FORMER EMPLOYER

1. Annual salary / 12 (month of year)

2. Resultant / number of working days in month

3. Resultant x number of days worked in month of leaving

So, using an illustrative full time £12K p/a salary and a leaving date of 12th May 2008...

1. £12,000 / 12 = £1,000 pm

2. £1,000 / 22 working days in May '08 = £45.45 per day

3. £45.45 x 8 days worked in month of May = £363.30 Gross Final Pay

Note this method takes no account of the amount and hours worked already paid in the year and may lead to a shortfall of the contracted £12k salary per year.

MY METHOD

My method (which does not vary accroding to month of year in which employee leaves)...

1. £12K / 52 weeks of year = £230.77

2. £230.77 / 5 paid working days of week = £46.15 per day rate

£46.12 * 8 days worked before leaving = £369.23

Terry Hillier

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Terry you may well have a point but life is far to short to justify the time and effort you are putting into this one. I agree with others that this is certainly not a cost cutting exercise but just an administrative process that sometimes advantages one side and sometimes the other.

You could look at

Taylor v East Midlands Offender Employment [2000] IRLR 760 EAT

Which although about holiday pay has some similarities as in that case the employer argued that correct method was to take 1/12 of annual then look at days worked. They also made some mistakes which means the case does not read across directly.

In teh absence of a clear policy or agreement then the courts are likely to calculate a days pay (for a full time employee) as being 1/260th of the annual rate - agreeing with your calculation. However the key is if your employers have a clear policy on this - if they have 120,000 people I would assume they do have.

To be honest I really cant see the point of going further down this route for £5.93 reduced by tax to around £3.50?

Keith

Thanks kindly Keith. Yes I agree life is too short, but fear not as I am researching more from a point of intrigue rather than to recover £20 (I’m not that hard up yet!). Your comments were very helpful and led me to two other related cases too:

Thames Water Utilities v Reynolds [1996] IRLR 186 and Leisure Leagues UK Ltd v Maconnachie EAT/940/01

What I have established is that:

1. The EAT disapproves of a method of calculation which varies with the length of a particular calendar month.

2. Payments should be made on the basis of working days (as opposed to calendar days), and MUST be done so in the absence of a contract term specifying the basis of calculation in order to conform with the WTR.

3. Companies paying annual salaries often have a method of calculating hourly rate (used as a basis for static overtime rats) that will differ from the method used to calculate the daily rate if joining / leaving a company mid-month.

4. The EAT disapproved method is more complicated to calculate compared with annual salary / 260 days and is more likely than not to generate a cost saving to the company compared with the 260 day calculation.

5. Cost savings achieved will apply equally to leavers and joiner of a part month, offering a two pronged effect. Whilst these savings are likely to be small on an individual basis, they can accumulate to a significant sum - particularly where large organisations with high staff attrition rates are concerned.

6. Reduction of final pay offers further cost savings by way of reduced employer NI and pension contributions.

Ultimately, whilst contrary to views expressed by others on this blog, I am absolutely convinced that the typical method employed to calculate part month payments for salaried staff is a deliberate, pre-meditated and conscious decision to reduce wage bills. If you use an online salary checking site (including those referred by government sites such as worksmart.org.uk), they all use the salary / 260 methodology to illustrate monthly, weekly, daily and hourly pay. I have seen many initiatives which aims to shaft the many by a little to amass a lot – you only need to look at the proposed government 2p fuel duty increase for a prime example! And yes – I will openly admit I am a cynical soul at times!

There are only two thoughts that make me doubt my conviction. Firstly, seeming as most companies appear to operate this methodology, surely they can't all be wrong? Secondly, why haven't unions picked up on this? My only rebuttal to these (excluding the possibility that I am wrong - which I don't think I am) is that the effects to the individual are small and not worth the personal investment to challenge and where affected on joining a company, it’s highly unlikely an employee is going to start kicking up a fuss only having got their foot in the door.

This is always a contentious subject, simply because there is no answer which is always 'correct'!

As has previously been implied, provided the employer is fair and states what the method is "up front", it's really down to individual employer choice.

There also needs to be recognition that there may be anomolies in some circumstances, typically when the employee leaves near the beginning or end of a month.

As an example (and it is just an example, anomolies could be found with any of the methods discussed), using the '365ths' rule from Lee's posting for someone who left on Friday 2nd May this year would give:

12000 / 365 * 2 = 65.75.

However if the person works 7.5 hours per day, the rate paid is £4.38 per hour, which is well below the National Minimum Wage.

The only way to be truly fair is probably to avoid monthly pay frequencies and use 4-weekly, where every pay period contains the same number of working days.

Neil.

Hi Terry,

to add an objective view to this discussion, my view is that there are no hard and fast rules to calculating final pay/part months.

There is nothing wrong in calculating a days pays pay based on 260th's of a year. There is also nothing wrong in calculating a proportion of the month using calendar days, particularly for salaried employees. Provided that the method used is consistent throughout, then there should be no problem.

For what it's worth, I'm always wary of calculating part month salaries where the calculation could be affected by any number of variables, such as the number of weekends that fall in a given period, or where the final pay could be affected merely by whether there are 30 or 31 days in the month.

The method I use ensures that no matter when in the month or which month an employee starts or leaves, the pay will always be the same, whether it be a February with 28 days, August, or 1 day into the month etc.

Here it is...

£12k / 365 x 12 = £394.52

You can see this is a very simple calculation, that doesn't change regardless of how many working days this period covers. I have based this on the still relevant Apportionment Act of 1870, which states that an annualised salary can be considered to be made up of calendar days, rather than working days. Hence, weekends could be considered as paid, even though they are not worked; that's why I have included them in the calculation. You will also note that this figure is still more than what you were paid and the notional figure you came up with. There is no ambiguity or argument as there are no variables to affect the calculation. Remember, that this is just one method though - it is neither definitive or exclusive, but is what I prefer to use.

I think you are in danger of misinterpreting the Thames Water Utilities v Reynolds [1996] IRLR 186 case particularly with your second point. This case was concerned with the calculation of holiday pay for unused leave, not the calculation of final pay. Without going too much off topic, the view upheld here was that if an employment contract stated that calendar days should be used for calculating the equivalent pay for annual leave, then this should continue; only in the absence of any contractual pay method should working days be used.

The point I am trying to make is that your employer has merely used one method, and you have countered this by illustrating another way.

Swings and roundabouts exist in all methods, but I would certainly be concerned in the unlikely event that an employer used different methods for calculating final pay each time, just to save a few quid here and there!

Terry,

Just to clarify ours is an off-the-shelf system with this calculation built in. I don't know is this is the norm for payroll systems.

Regards, John

Hi Terry

My point was not that your calculations were flawed just that it was a huge assumption to say that the company are deliberately doing this to make money.

You obviously feel strongly about it but the burden of proof is still on you and the question is how far you want to take this? You may get some legal help but they can only represent you. I'm still sure that legal reps would not proceed even for a £20 loss.

I assume that you don't have a mnadate to represent the other people that may have had a loss so do you have a union that you can talk to about this who may have some collective bargaining power?

To sum up I'm not saying your point isn't valid just that you would need to have conclusive proof to back up your point and what you have prsented here is opinion only.

Clive

Thanks for your comments Clive. I appreciate where you're coming from but believe I may not have fully represented the big picture.

I have done some more digging and have established that the method used is liable to equate to a incorrect pro-rated annual salary and arguably amounts to breach or contract / unlawful deduction of wages.

In order to use the suspect method, one must first establish that total salary paid to date is a correct pro-rata of annual salary in order to adhere to the annual salary.

For example (using the suspect method):

There are 262 paid working days in 2008. I leave on 12th Feb 08 which has 21 paid working days and I earn £12k per year.

Therefore, I have been paid a total of £1,380.95 fron Jan to 12th Feb (£1K for Jan + £380.95 for 8 days in Feb).

HOWEVER, the period 1st January to 8th February has 31 paid woking days (23+8), meaning £12K / 262 x 31 = £1,419.85.

This leaves a SHORTFALL of £38.89 for the same hours worked. My contract, is based on an annual salary, as is most people, and not on a monthly salary, this therefore results in an underpayment.

This situation does not arise with traditional method of calculation (HourlyRate = AnnualSal / 52weeks / WeeklyHours) and is what is used pretty much universally to base overtime payments - why? Why have two methods when once would suffice - there is a reason for everything!

Regarding motive, my former employer has c.120,000 employees and has an assumed, turnover of 15% which equates to 18,000 leavers per year. The suspect method of calculation works in the employers favour 7 months in the year (c.60%), 2 of which experience the highest attrition rates (immediatly following bonus payment). Taking £5 as the average underpayment (includes accounting of offset from overpayment where employee is paid more in the remaining 5 months of the year if they time their leaving date well), this means an annual saving of £90,000 per year - Not bad money if you can get it, especially as the only cost is a 'one-off' to change the payment algorithm.

When I left my employer I was underpaid by about £20 and the example above worked out to be a £0 underpayment, I therefore feel that the true cost saving is very much more and perhaps as much as £360,000 per annum for doing very little! It is also my belief that this is creative accounting designed to hoodwink individuals who are often powerless against large organisations who know that such matters are unlikely to be challenged or pursued through the courts given the small individual amounts.

I am unable to see the flaws in my logic (that's not to say there aren't any!), so I would appreciate any contradictory (or otherwise) feedback.

Many thanks,

Terry.

Hi Terry, this feels like an emotive issue to you and I don't want to sound flippant but I'm not sure you will discover one nationally accepted method of calculation and don't agree that it feels like a conspiracy to cut costs.

Many company's do use automated payroll systems and I'm sure some will calculate one way, some another way. I do think it's a dangerous assumption to say that it's a deliberate wage cutting exercise.

Looking at it from the outside, if your org had 100 people leave per month and they were all paid £5 less, the company would be up £6000 a year which would not make a huge difference to a large org, I don't think.

If you are unhappy write to your ex-employers and state your case, they may pay you the difference. If they don't you may look to take legal action but for the amount involved, I'm not sure you would get a pro bono lawyer to help and you could spend big money to prove your point of view.

Clive

Hi John - thanks for your comments. Would you happen to know if this a fairly new thing? Its such a awkward way of working out final pay and if adopted industry wide, this does suggest an alterior motive than to pay fair dues!

If overtime is paid using a static rate not dependant upon which month overtime is accrued or paid, does this not pose a contradiction in practises?

Has nobody in your organisation enquired about this method of calculation previously? Are you aware whether adopting this approach was a concious effort on your organisation's part or simply an inherited algorithm from an off the shelf package perhaps?

Thanks again.

Terry.

Terry,

Our payroll system automatically calculates payments for someone leaving mid-month and uses exactly the same method as you ex-employer. Anything else requires a manual calculation.