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Holiday Pay Update

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There have been a number of changes to the holiday pay regime recently following the cases of Williams, Lock and Bear Scotland. This article addresses some of the changes. For a more comprehensive review of the position see our longer form article.

What should now be included in holiday pay under the Working Time Directive?

Following the EAT’s decision in Bear Scotland, statutory holiday pay derived from the Working Time Directive must be calculated in accordance with the tests laid down in the ECJ case law, whereby holiday pay is based on pay that is normally received and must include:

o Payments linked intrinsically to the performance of the tasks which the worker is required to carry out under their contract of employment
o Payments which relate to the worker’s professional and personal status.

Below is a table showing some types of pay and whether they should be included when calculating holiday pay.

Type of Pay

Should 
it be included?

 Anything else?

Commission

Yes

The ECJ in Lock ruled that commission must be included as it was intrinsically linked to the performance of tasks under the workers contract. It must be based on average commission earned “over a reference period which is considered to be representative”

Guaranteed (compulsory) overtime

Yes

Guaranteed (compulsory) overtime is covered in “normal working hours” under the ERA 1996 and therefore is to be included in holiday pay in respect of the full 5.6 weeks’ leave.

Non-guaranteed overtime

(where the employee is obliged to work overtime if required but the employer is not obliged to provide it)

Yes

Following the EAT’s decision in Bear Scotland it is clear that non-guaranteed overtime should be included in leave taken under the working time directive (ie 4 weeks holidaypa) as it is required by the employer and thereby intrinsically linked to a worker’s work

Voluntary Overtime

Possibly

This type of overtime was not dealt with specifically by the EAT and so the position is less clear. We consider that voluntary overtime should be included in holiday pay where a settled pattern of overtime has developed. It is likely that cases on the inclusion of voluntary overtime will follow.

Allowances

No

Payments which are “intended exclusively to cover occasional or ancillary costs” arising at the time the worker performs the tasks required by the contract are excluded from holiday pay under the Working Time Directive.

Productivity, attendance or performance bonuses

Yes

The test is whether the payment is “intrinsically linked” to performance of tasks by the worker under their contract, not whether it is “exclusively” so. Therefore a bonus that depends on team, rather than individual, performance is potentially within scope.

Annual discretionary (and other) bonuses?

Possibly

Bonuses are one of the biggest grey areas and are likely to give rise to future litigation.

How far back can employees claim?

Before the EAT delivered its judgment in Bear Scotland, employers were faced with the possibility of back pay claims for underpaid holiday stretching back many years.

However, the judgment in Bear Scotland effectively limited the ability of employees to claim for underpayments. This is because it established that employees could not claim for underpaid holiday pay where more than three months had elapsed between deductions.

In addition the Government has now introduced the Deduction from Wages (Limitation) Regulations 2014. They do two things:

1. limit all unlawful deductions claims to two years before the date the ET1 is lodged; and
2. explicitly state that the right to paid holiday is not incorporated as a term in employment contracts

This has the effect of removing any chance employees have of bringing long-term claims for back holiday pay. The new regulations don’t apply to ET1’s presented before 1st July 2015 so we may see longterm back-pay claims being submitted quickly to avoid the effect of the new regulations. To avoid being subject to this it would be worth considering paying holiday pay incorporating commission and guaranteed overtime now and thus benefiting from the 3 month limitation imposed in Bear Scotland.

Whilst introduced in the wake of the holiday pay issues, the regulations do in fact apply to all claims for unlawful deducation from wages with limited exceptions.

If you require any further advice or assistance please contact a member of the employment team.

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