Holiday pay - now what?!

 It would be surprising if you were totally unaware of the recent EAT cases regarding the calculation of holiday pay, and what should be included.  The controversy relates to the difference between the way holiday pay has historically been calculated in UK law under the Working Time Regulations 1998 (WTR) and the way the European Working Time Directive says holiday pay should be approached.

The UK Working Time Regulations calculation

The WTR set out that for the purposes of calculating a week’s pay in respect of periods of statutory annual leave, s221 to s224 of the Employment Rights Act  1998 (ERA) apply. These provisions make clear that a week’s pay under these circumstances will be contractual pay only.  So where an employee is required to undertake overtime as part of the contract of employment, a week’s pay for statutory annual leave purposes will include his contractual entitlement to overtime.

Where, however, an employee undertakes overtime which is not contractually required, then pay during periods of statutory annual leave will only comprise his contractual entitlement to pay.

This is how most employers have treated non-contractual overtime however the cases being considered by the EAT are calling this into question because there is a conflict between the European Working Time Directive and the WTR in relation to the calculation of holiday pay.

The European Working Time Directive principles

Although the Working Time Directive (WTD) leaves the method of calculating holiday pay to national legislation, in the case of Williams and ors v British Airways plc (2011) the CJEU ruled that workers should receive their “normal remuneration” when assessing holiday pay.  The court went on to say that a worker on annual leave is entitled not only to basic salary, but also to remuneration which is “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided”.  

Following the Williams case, in May 2014 the CJEU went on to decide in ZJR Lock v British Gas Trading Ltd & ors that the proper interpretation of the Working Time Directive required that an employee’s commission payments should be taken into account when calculating leave to ensure there was no deterrent to taking leave.  In this case, 60% of Lock’s normal pay was made up of commission based on sales in the previous month.  Lock made a claim for outstanding holiday pay because during periods of leave he could not make sales which resulted in his pay for the following month being lower than usual.  The CJEU was asked how this commission based element of pay should be calculated but declined to answer this question, referring it back to the national courts to decide.  

So to the recent EAT cases...  

The best known case headed for the EAT was Neal v Freightliner. Neal’s contract required him to work 35 hours per week and stated that he may be required to work overtime when necessary.  In practice Neal always worked at least 8-9 hour days and received a premium for the hours worked over and above his contractual hours.  Freightliner calculated Neal’s holiday pay in line with s221-224 of ERA, disapplying any non-contractual payments.  Following the CJEU’s decision in the Williams case, the ET concluded that adopting the calculation of a week’s pay set out under ERA did not properly implement the WTD and Neal’s claim was upheld.  Freightliner appealed to the EAT but it appears the case was settled just days before it was due to be heard.

The combined cases of Fulton v Bear Scotland and Wood v Hertell (UK) Ltd went ahead to be heard by the EAT on 30-31 July 2014 dealing with whether overtime should be included in the calculation of holiday pay as well as considering how far back claims for unpaid annual leave could go.  The judgment had not yet been handed down but as you might expect, the arguments were complicated!

So, what should be included in holiday pay now?

Case law so far has made it clear that the calculation of holiday pay for the 4 weeks’ WTD entitlement must reflect normal remuneration so could include any or all of the following:

• commission
• productivity bonuses
• shift or unsocial hours allowances
• attendance payments
• call-out or standby pay
• acting promotion or extra duties pay, and
• contractual overtime.  

Regardless of the outcome of these latest cases, if your holiday pay doesn’t already reflect a worker’s “normal remuneration” you are at risk of a claim for underpayment of holiday pay.   Clearly there is still the outstanding question of exactly what this means in relation to overtime but indications are that it will need to be included.  

What happens next?

Judgment on these cases is not expected until October at the earliest.  At present there is a conflict between the calculation of holiday pay as described by the UK WTR and the principles of the European WTD.  How this will be addressed remains to be seen, but some commentators have suggested the EAT will have to rewrite the WTR to resolve the conflict.   

The implications may be that although employers were only following the rules under the Working Time Regulations, employees may be able to claim back-pay for underpaid holiday pay back to the later of the date they joined or 1998 (when the WTRs were introduced).  This is because the claims will be made as an ongoing unlawful deduction from pay.  Ex-employees will generally not be able to make a claim because claims will have to be made within three months of the last unlawful deduction taking place.

The good news (if there is any to be had) is that the holiday pay calculations only apply to the 20 days’ statutory annual leave and not the 28 days.  The 20 days being the minimum required under the Working Time Directive.

Some commentators have suggested that employers might break the chain of deductions, and therefore remove their historic liability, by banning holiday for a period of three months thereby rendering all claims out of time (assuming noone makes a claim during this time) but whether this would work or not is uncertain.  Such an approach could just highlight the issue to staff as well as create operational difficulties later in the year.  

We will of course keep you up to date with developments in this area but if you want to discuss this with us or get a clearer picture of your own organisation’s situation and risk, please just get in touch.  

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