In recent years, the question of what should be included in the calculation of holiday pay has been a key issue before both the UK and European courts.
As the dust settles from the recent decision in British Gas Trading Ltd v Lock and another (2015), it is a useful time to reflect on where we are now and what employers need to do to give effect to the decisions in recent cases.
The right of workers to take paid annual leave, are set out in the Working Time Regulations 1998 (the Regulations), which implements the Working Time Directive (the Directive). The aim of the Directive is to protect workers' health and safety by ensuring that they have adequate rest periods, including periods of annual leave.
The Directive provides that every full time worker is entitled to paid annual leave of at least four weeks (20 days). In the UK, the Regulations state that full time workers are entitled to a minimum of 5.6 weeks (28 days) paid annual leave. The additional 1.6 weeks' (8 days) annual leave represents the number of public holidays in the UK.
The Directive does not specify how paid leave should be calculated, and it is left to each national state to decide. The Regulations specify that workers are entitled to be paid a “week's pay” for each week of annual leave, with the rules on what amounts to a week’s pay being set out in the Employment Rights Act 1996 (the Act). The rules on how to calculate a week’s pay are complicated and depend on whether workers have normal hours of work or not. However, in 2006, the European Court of Justice (ECJ) held in Robinson-Steele v RD Retail Service Ltd that workers must continue to receive their “normal remuneration” during their annual leave.
What should be included in holiday pay?
Two decisions from the ECJ established that the rules in the Act do not properly implement the requirement for workers to receive their “normal remuneration” during annual leave. Those decisions set out what should be included in the calculation.
Firstly, in Williams and others v British Airways plc (2010), the ECJ held that workers are entitled to be paid for any amounts which:
are intrinsically linked to the performance of the tasks they are contractually required to do. Examples would include: productivity, attendance or performance bonuses, standby and emergency call-out payments and "acting up" supplements; and
relate to their personal and professional status, such as their seniority, length of service and professional qualifications.
Secondly, in Lock v British Gas Trading Ltd and others, the ECJ also held that that where remuneration ordinarily includes sales-based commission, holiday pay cannot be calculated based on basic pay alone, as otherwise the worker will be placed at a financial disadvantage when they return from leave, since no commission will be earned during the annual leave period. The ECJ emphasised that if only basic pay was due, the worker might be deterred from exercising the right to annual leave, which would be contrary to the purpose of the Directive.
Following these decisions at a European level, the Employment Appeals Tribunal in Bear Scotland Ltd and others v Fulton and others (2013) subsequently held that non-guaranteed overtime (where the employer is not obliged to provide the overtime, but where the worker must accept it, if offered) should be included in the calculation of holiday pay.
The EAT also set out some guidance, and held that a payment has to have been made for a sufficient period of time for it to qualify as "normal" remuneration. Where there is a settled pattern of work, this should be easy to identify, but if there is no settled pattern, an average can be taken over an appropriate reference period. The EAT did not specifically comment on the 12 week reference period set out in the Act, and so the appropriate reference period remains a grey area and it is arguable that if commission or overtime fluctuates widely during the year (for example, for seasonal workers), a much longer period would be more representative.
Completely voluntary overtime was not dealt with definitively by the EAT and so the position is not clear. However, some Employment Tribunals have interpreted voluntary overtime as forming part of normal remuneration if a settled pattern has developed over a sufficient period of time (Neal v Freightliner (2012)). This is also consistent with the ECJ’s approach, that workers should not be financially disadvantaged and therefore deterred from taking their annual leave. However, it is highly likely that there will be further case law in this area.
Next Steps for employers
Employers who have not already adjusted their calculations of holiday pay need to do so going forward. This means that employers need to consider "what is normal remuneration?" bearing in mind the guidance from these recent cases. There remain a number of grey areas for particular payments, including some types of bonus and tips and service charges paid via a troncmaster. Further case law in this area may provide further guidance on this.
One unsatisfactory point which remains is that the decisions regarding “normal remuneration” only apply to the four weeks of leave which is set out in the Directive, and not to the additional 1.6 weeks (8 days) leave which is included in the Regulations. This means that employers can treat the calculation of holiday pay for the two periods of leave differently, although in practice, many employers may decide that the administration involved is too burdensome. If you do intend to treat the two periods differently, you will need to determine which four weeks include these additional payments – the first four, or the last four or somewhere in-between. Because the extra 8 days leave under the Regulations are described as "additional leave", the default position is likely to be that it is the first four weeks taken in a leave year which must be based on “normal remuneration”, however, this could be varied in the contract of employment.
Employers should also take stock and consider the prospect of historical claims by workers for the inclusion of commission, overtime payments and other allowances in their holiday pay. Claims for underpaid holiday pay can be brought either under the Regulations, or under the Act as a deduction from wages claim. Until recently, the latter type of claim could go back several years where there was a series of underpayments. However, a new 2 year limit on retrospective unlawful deduction from wages claims was introduced to limit the impact on employers, and applies to claims presented on or after 1 July 2015.