Holiday Pay Update

Holiday pay- the story so far

It has been held that non-voluntary overtime should be included when calculating holiday pay.

Under the Working Time Regulations, workers are entitled to statutory minimum holiday of 5.6 weeks (a maximum of 28 days), including bank holidays. The first four weeks of leave represent the UK implementation of the Working Time Directive. The Directive requires that annual holiday is paid, but it does not stipulate the rate at which it is to be paid.

A distinction is made between employees with “normal working hours” and those with “no normal working hours”. Generally, a worker who has “normal working hours” will have their holiday pay calculated with reference to those normal hours worked without commission or overtime. This can produce results that do not always equate to average earnings.

Where an employee does not have normal working hours their holiday pay will be based on their average weekly remuneration (including overtime pay, bonuses and commission) calculated over a 12 week reference period.

In British Airways PLC v Williams, the ECJ held that pilot’s holiday pay entitlement should not be limited to basic salary but should correspond to “normal remuneration”. This means that pilots should be entitled to holiday pay in respect of remuneration that is linked intrinsically to the performance of tasks which they are contractually obliged to perform and payments that relate to their professional or personal status. Williams concerned the Aviation Directive and not the Working Time Directive, the ECJ ruled that the same principles apply to each.

In the subsequent case of Lock v British Gas Trading Limited, which concerned commission payments, the ECJ applied its earlier decision in Williams to the Working Time Directive. It held that holiday pay under the Working Time Directive cannot be calculated based on basic salary alone where a worker’s remuneration includes commission determined with reference to sales achieved. If commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave, since no commission will be generated during their holiday period. In such circumstances, the worker might be deterred from exercising the right to annual leave, which would be contrary to the Directive’s purpose.

These decisions have led to many questions about the way UK calculates holiday pay under the Working Time Regulations. A number of cases have been brought in the employment tribunals with workers seeking to challenge their employer’s calculation of holiday pay based on salary only, and seeking to include elements such as commission and overtime. So what is the position at the moment?

Overtime pay

As a result of recent cases, where an employee is guaranteed compulsory overtime,  this should be included in the calculation of “normal working hours”. This should be included in holiday pay in respect of the full 5.6 weeks leave.

In addition, the Employment Appeal Tribunal has held that payments for overtime which a worker is required to work but which an employer is not required to offer (non-guaranteed overtime) is normal remuneration. This means that non-guaranteed overtime should be taken into account when calculating holiday pay for the purposes of the minimum four weeks’ statutory annual leave. This does not apply to the additional 1.6 weeks which will remain subject to the weeks’ pay provisions of the Employment Rights Act 1996.

However what is the position regarding purely voluntary overtime where there is no obligation on either side? The Employment Appeal Tribunal has not as yet reached any definitive conclusion regarding the treatment of voluntary overtime. However it is possible that tribunals will interpret voluntary overtime as forming part of normal remuneration if a settled pattern has developed over a sufficient period of time to justify the label of “normal” pay.

Commission

The ECJ has ruled that commission must be included as it was intrinsically linked to performance of tasks under a worker’s contract. In such a situation a worker’s pay would normally include commission earned on previous sales during holiday periods (in arrears) but he suffered a financial disadvantage after the holiday as a result of not having earned commission during that time.

The ECJ ruled that holiday pay must include an element to offset this disadvantage. However the calculation in relation to commission has been left up to UK courts. The ECJ has stipulated that the calculation must be based on average commission earned over a reference period which is considered to be representative. In the absence of any further guidance from the ECJ, tribunals will have to approach this question on a case by case basis and may choose a different reference period depending on the circumstances. It is arguable that if commission or overtime payments fluctuate widely during the year, a 12 week period may not be representative. This issue is due to be considered by an employment tribunal, which is expected in February 2015. We will keep you up to date with any developments.

Challenges for back pay

The Employment Tribunal has significantly limited the extent to which workers can make retrospective claims for under paid holiday. It has held that workers cannot use each shortfall in holiday pay as part of a series of deductions where a period of more than 3 months has elapsed between the deductions. Because the additional 1.6 weeks’ leave does not have to include non-guaranteed overtime, this may mean that it is easier to show a break in the series of deductions of more than 3 months because the additional leave will be paid at the correct rate.

In addition the government has intervened and laid regulations before parliament to amend the Employment Rights Act 1996 to impose a 2 year limitation on unlawful deductions from wages claims. However workers can still make claims under the existing arrangements for the next 6 months which will act as a transition period before the new rules come into force, which will apply from 1st July 2015.

Please note that this is not the end of the story and there will be developments as further cases are tried. We shall keep you up to date with any developments.

If you have any questions, please do not hesitate to contact Claire Berry on 01480 442040 or email claire.berry@leedsday.co.uk


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