The calculation of holiday pay has been a hot topic in the courts recently. Various claims have been made against employers arguing that holiday pay calculations should take into account more than just an employee’s basic salary. However, despite several high profile decisions, the position is still far from settled and it may be another few years before we have clarity on the matter.
The various decisions have adopted the consistent position that an employee should not be penalised (by receiving less money) for taking a period of annual leave. The courts have held that pay during an employee’s holiday should be equivalent to the ‘normal’ pay received and should be calculated by reference to pay normally received by a worker for tasks they are required to perform under their contract. In another decision it was emphasised that holiday pay needs to reflect all payments that are ‘intrinsically linked’ to the employee’s performance of the tasks under their contract.
The current position emerging from these decisions is:
- An employee should receive pay for non-guaranteed overtime (work that, if requested, they are obliged to perform) (Bear v Fulton). It is also accepted that contractual or guaranteed overtime should be included. The position in relation to voluntary overtime is still unconfirmed but at this stage, it should not be ruled out that this too could form part of the holiday pay calculation.
- Holiday pay should include commission payments and any other sum that is intrinsically linked to the performance of the individual’s contract (Lock v British Gas Trading Limited). This case was referred to the European Court of Justice (ECJ) which also directed that the commission element should be averaged out over a specified reference period in order to determine a fair amount to be paid alongside basic salary. The length of the specific reference period has not yet been confirmed as the ECJ referred this decision back to the UK Employment Tribunal.
- Regular extra voluntary hours and shift premiums should be included if they are intrinsically linked to the performance of the employee’s job (Neal v Freightliner).
- Holiday pay should include all elements of normal remuneration that in this case, for pilots, included flying supplements. Only sums that intended exclusively to cover expenses could be excluded (Williams v British Airways).
As these decisions have been predominately about the interpretation of the requirements of the Working Time Regulations, the above decisions currently apply only in relation to the first four weeks of an employee’s holiday entitlement (as required under the EU Directive) and not the additional 1.6 weeks provided by UK legislation.
Clearly, the decisions mean that some employers have not only to change the way holiday pay is calculated from now on but also consider whether they will now face claims from employees for back-dated shortfall in holiday pay.
Backdated claims could result in costs that could potentially put employers out of business. However, the most recent decision (Bear v Fulton) held that most backdated claims will be time barred. It was decided that where there is a series of deductions (which would be repeated incorrectly paid holiday pay) and there is a gap of more than 3 months between successive deductions, those earlier deductions would be time barred (i.e. the employee could not claim for this). This part of the decision was a huge relief to many employers and although it was noted by the EAT judge that he expected that this part of the decision would be appealed, Unite (who were backing the employees’ claims) have reportedly now confirmed that they do not intend to challenge the decision. This decision was on the basis that their intention is to pave the way for the future for employees and not to bankrupt companies.
What action should employers take?
Whilst the situation is still unsettled, employers need to take action now. It will be important for employers to:
- Look at the additional elements of remuneration and determine whether these can be said to be intrinsically linked to the performance of tasks under the employee’s contract.
- Determine your own reference period for assessing average earnings where additional payments are received by employees which vary from time to time. We should have clarification at a later date if a specific reference period will be set and, if so, what this should be. For now, the reference period should be fair and produce accurate and proportionate results.
- Communicate the situation to staff and explain when the recalculated payments will commence.
Although it seems as though most backdated claims will be time barred, this could change in the future, so you may wish to obtain specific legal advice on the possible risks for your business. If employers do not make the necessary changes going forward, tribunal claims may be raised against them. Whilst some employees may be put off with the lengthy process and associated costs, if multiple claims are brought, the process for employees will be much simpler and cheaper – and potentially a lot more costly for businesses.
For further information please contact Hannah Roche on 0131 226 8216 or Hayley Anderson on 0131 226 8220.