Holiday pay

Posted on: February 5th, 2015

This winter has seen some further cases and announcements in the long running series of questions relating to holiday pay.

Questions which have been addressed are:

  • How is holiday pay calculated for a worker whose pay varies?
  • If a worker claims unpaid or a shortfall in holiday pay, how far back can they claim?
  • How is holiday pay calculated for an employee whose pay varies?

The Working Time Regulations 1998, which set out workers’ rights to paid annual leave, refer to the definition of “a week’s pay” in the Employment Rights Act 1996 sections 220 – 224.

Sections 221(3), 222 and 224 deal with the situations where pay varies according to the amount of work done, or the time of work or when the worker has no normal working hours.  An employee whose pay or hours vary is entitled to be paid holiday pay based on the average number of weekly normal working hours at the average hourly rate of remuneration over the previous 12 weeks.  If there are no “normal hours,” the calculation is based on their average pay during the previous 12 complete weeks they have worked.

Over the last few years, cases have established that in order to be compliant with the European Working Time Directive, extra income from commission, overtime or other payments should be taken into consideration, even if these would not be described as “normal working hours.”

Commission

In the case of Lock v British Gas [2014] it was held by the European Court that a worker who is partly paid by commission is entitled to have their commission payments taken into account when calculating their holiday pay. The Leicester Employment Tribunal will hear this case on 4th February when it will have to decide the method of calculating the commission payment element of holiday pay.

Bonus payments

Bonus payments which are intrinsically linked to the performance of a worker’s duties should be included, but there are no reported cases which suggest that a bonus which is linked to other factors, e.g. the employer’s overall profitability, need to be included.

Allowances on top of basic pay

In the case of Williams v British Airways [2011] the European Court held that if an employee’s income consists partly of allowances on top of basic pay these should also form part of the calculation of holiday pay if they are intrinsic to the job itself.  If the allowances are intended to exclusively cover expenses (e.g. mileage claims) they are not included.

Overtime

Recently the Employment Appeal Tribunal in the case of Bear Scotland v Fulton [2014] held that payment for overtime must also be included in the calculation of “a week’s pay” whether that overtime is guaranteed compulsory or voluntary.

Claims for holiday pay

A worker who has been denied holiday pay due to them, either because the employer refuses to give them any or all of their paid holiday entitlement or because the holiday pay has been wrongly calculated, may claim unpaid holiday pay.  Typically these claims are made after their employment terminates and the worry for employers is facing large claims for a shortfall in holiday pay going back many years.

These claims are based on an “unlawful deductions from wages” which must be brought within 3 months of the deduction or 3 months of the last of a series of deductions.

In the recent case of Bear Scotland v Fulton [2014] the Employment Appeal Tribunal held that if a worker has a gap of more than 3 months between unpaid or part-paid holiday leave, any claims for payments due before that time cannot be counted as part of a series of deductions.

The government has introduced the Deductions from Wages (Limitation) Regulations which will mean that any claims for previous unpaid holiday (and other unlawful deductions from wages claims) submitted from 1st July 2015 onwards will be limited to 2 years.

So, for an employer facing a claim of unpaid holiday pay going back a number of years, the first thing to do is to check for the last 3 month period in which the worker did not take holiday.

Contractual holiday pay, statutory holiday pay and holiday pay under the European Directive

It should be noted that where an employee is entitled to more than the statutory minimum of 5.6 weeks’ holiday, the rules do not apply to any holiday in excess of that. A contract of employment can make different provision in relation to holiday pay for any extra holiday entitlement.

Just to complicate matters further, as the European directive provides for a minimum of 4 weeks’ holiday pay and domestic legislation gives 5.6 weeks, then any rights which go against domestic legislation but are required to comply with the Directive only apply to 4 weeks’ leave, not to 5.6 weeks.

This means that the cases relating to the calculation of a week’s paid holiday can be carried out differently in respect of 4 weeks’ annual leave to the remaining 1.6 weeks’ annual leave. It would therefore be lawful for employers to have a different (more generous) calculation of holiday pay for a worker’s first 4 weeks’ annual leave than their last 1.6 weeks.

Many employers may find that it is not worth introducing this extra complication in calculating holiday pay.

Points to consider

If you have staff who are paid additional payments above their basic pay, which do not form part of their holiday pay, you need to consider the following:

  • How much should you pay them in holiday pay in the future (you may need to await the Employment Tribunal’s judgment in the Lock case for a definitive answer)?
  • Should you make a payment to cover some back pay for previous holiday pay (to create a period in excess of 3 months when the full holiday pay has been reimbursed and therefore limit the potential size of any future claims)?
  • Should the employment contracts be redrafted in relation to holiday pay to limit your exposure to breach of contract claims?