You would be forgiven for being slightly confused as to what is now included in your holiday pay calculations. Recent case law has muddied the already murky depths of annual leave pay, along with adding the additional threat of litigation by allowing historical claims.
Here at Bhayani HR & Employment Law, we aim to keep things simple and have waded through the legal jargon to produce you an easy to follow guide.
Holiday pay used to be calculated using the employee’s basic pay. This was generally determined by their contracted hours or, for shift workers or those who not work regular hours, by taking the average earnings of the preceding 12 weeks. Holiday pay did not include bonus payments, overtime or any additional payments for expenditure.
The relevant legislation is the European Working Time Directive (2003/88/EC) which states that an employee or worker is entitled to 4 weeks’ annual leave per year. This was implemented into UK law under the Working Time Regulations (1998), which increased the amount of annual leave to 5.6 weeks.
What does the case law say on Holiday Pay?
The first case that challenged the principle that holiday pay should only include basic salary was Williams and Others v British Airways plc. It was found that holiday pay under the Aviation Directive (2000/79/EC) should be equivalent to a pilot’s normal remuneration which includes any pay which is linked intrinsically to the performance of tasks that they are contractually obliged to perform and payments which relate to their professional or personal status. Any pay which was intended to cover additional expenses related to the performance of duties need not be included. The European Court of Justice ruled that these principles should also apply to the Working Time Directive (2003/88/EC).
The ECJ applied the decision in Williams to the case of Lock v British Gas Trading Ltd. In Lock, the ECJ decided that holiday pay should also include commission as otherwise an employee would receive less pay whilst on holiday and this may deter them from taking holidays.
The floodgates have been opened and we have seen a flurry of cases seeking to clarify that holiday pay should also include payments for commission, attendance bonuses, overtime and travel allowance. The matter has now been considered by the Employment Appeal Tribunal in the conjoined appeal of Bear Scotland Ltd v Fulton and another and other cases. Whilst Bear Scotland specifically related to non-guaranteed overtime and travel allowances, the EAT also held that the Working Time Regulations 1998 can be interpreted to comply with this new approach to calculating ‘normal remuneration’.
What do I now have to include in a holiday pay calculation?
The end result is that holiday pay must include pay that is normally received which comprises of payments intrinsically linked to performance of duties under the contract of employment and payments which relate to the employees’ profession or personal status.
- Commission– this should be calculated over a reference period which is representative and does not put the employee at a disadvantage.
- Guaranteed overtime
- Voluntary overtime if the employee regularly works it (although this is still a grey area which awaits further clarification).
- Travel allowances and other allowances which are not occasional or ancillary. An example of such an allowance was given in Bear Scotland where the EAT allowed the inclusion of Travelling Time Payment and Radius Allowance. These payments were not paid purely because of where the employee lived and was made up of an expenditure payment and a taxable element. It was found that the taxable remuneration should be included in their holiday pay calculations.
- Attendance or Performance Bonus which is intrinsically linked to the performance of tasks but at the moment, there is no requirement to include a discretionary bonus which is not linked to performance (although this is yet another grey area which may face challenge in the future).
- Standby and emergency call out payments
- Acting Up supplements
- Any pay or tips which are paid via the employees’ wages and are from the employer e.g. not cash in hand tips.
What is the correct reference period to work out Average Weekly Pay?
If the employee has a fixed working pattern, then it will be easier to identify the pay which is usually received. The payment may still need to include any of the above listed.
For employees with no normal working hours or shift workers, a reference period of 12 weeks should still be used, however, as the only guidance available is that the period must be ‘considered to be representative’, this may mean that an employer should consider taking into account a longer period for certain employees.
Do I have to use this new calculation for all the holidays I give my employees?
As these rulings apply to the Working Time Directive, which prescribes that an employee is entitled to 4 weeks’ annual leave, it currently stands that the enhanced holiday pay only applies to the first 4 weeks of an employee’s holiday entitlement.
This means that if an employee receives 5.6 weeks or annual leave or more, an employer only need to pay the enhanced entitlement to the employee for 4 weeks’ holiday. It is suggested that it will be the first 4 weeks of annual leave that will count, however, this does mean that an employer should seriously consider whether a 12 weeks’ reference period is representative or whether a 12 months’ reference period would be more appropriate.
How to manage the threat of historical holiday pay claims
An employee may be able to claim compensation for underpaid holidays as an unlawful deduction of wages claim in the Employment Tribunal.
We would expect an employee to initially raise a grievance with the employer before taking formal action. The employee will also still have to contact ACAS and register for Early Conciliation before they issue a claim in the Tribunal.
We would urge any employer who has been approached for additional holiday pay to contact us before making any payments or calculations.
We will assess whether the employee has brought their claim within 3 months from the last unlawful deduction and we will be able to advise whether there has been a ‘series of deductions’ which will determine how much additional holiday pay would need to be paid. All claims for unlawful deduction of wages are limited to 2 years in any event.