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Holiday Pay - Update (Long Version)

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The old position and Working Time Regulations Holiday Entitlement

The European Working Time Directive (WTD) provides that workers are entitled to at least four weeks paid leave each year.

The UK national legislation (the Working Time Regulations) that flowed from the Directive enhances this right and states that a worker is entitled to 5.6 weeks' annual leave in each leave year (this is equivalent to 28 days for those who work five days a week).

This is made up of:

  • The right under the WTD to a minimum of four weeks' annual leave (20 days for full time employees) each year.
  • The domestic right to an additional by 1.6 weeks' annual leave (8 days for full time employees) each year which represents the number of public holidays in the UK in a year.

It has been common practice in roles that include overtime and/or commission as part of an employee’s remuneration to limit the calculation of holiday pay to basic pay only.

The outcome of this approach was that an employee would generally be paid less during a period of holiday than they would usually.

This approach has been considered in several cases and the outcome and impact of those cases is set out below.

Williams and Lock

In Williams and others v British Airways plc (Case C-155/10) the European Court of Justice (ECJ) held that pilots’ holiday pay entitlement under the Aviation Directive should not be limited to basic salary but must 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.
  • Payments that relate to their professional or personal status. This would include payments relating to a worker’s seniority, length of service or professional qualifications

Although Williams concerned the Aviation Directive and not the Working Time Directive the ECJ ruled that the same principles applied to each.

In the subsequent case of Lock v British Gas Trading Ltd (Case C-539/12) 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 by reference to sales achieved.

If commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory 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 led to many questions about the way in which the Working Time Regulations 1998 approach the calculation of holiday pay. A number of cases were brought in the Employment Tribunal seeking to challenge the way in which employers were calculating holiday pay.

The effect of Williams and Lock

Broadly speaking, the focus of holiday pay under the Working Time Directive, as interpreted by the ECJ, is on remuneration, whereas under the WTR 1998 the focus is on the hours spent and in some cases, the nature of the work done.

The WTR 1998 provide that a worker must receive a week’s pay for a week’s holiday, using the concept of a week’s pay as set out in sections 221 to 224 of the ERA 1996. The difficulty is that the definition of a week’s pay differs depending on whether a worker has “normal” working hours or not.

Where an employee works different hours, holiday pay is calculated using a 12 week reference period. This is likely to comply with the ECJ’s interpretation as it will include commission, overtime etc. Where a worker works normal hours, the employee will have holiday calculated by reference to those hours. This would usually mean basic salary, disregarding any overtime and without any bonuses, commission etc.

Following Williams, employment tribunals began to take a creative approach to these provisions, giving effect to EU law by reading words into the WTR 1998 where necessary. This approach has since been confirmed as appropriate in the Bear Scotland case (see below).

Bear Scotland

In Bear Scotland the EAT considered how overtime and certain travel-related allowances should be treated for the calculation of statutory holiday pay provided for by the Working Time Directive, in light of Williams and Lock. The EAT held that:

  • Article 7 of the Working Time Directive requires normal remuneration to be paid during holiday periods.
  • There should be an intrinsic or direct link between the payment claimed and the work a worker is required to carry out. Where overtime is required, it would be perverse to hold that the resulting overtime pay was not intrinsically or directly linked to the work. Therefore, Article 7 requires non-guaranteed overtime (that is, where the employer is not obliged to provide the overtime, but the worker is obliged to work it if requested) to be paid during annual leave. The position regarding voluntary overtime is unclear.
  • The WTR 1998 can (and should) be interpreted to conform with Article 7 of the Working Time Directive.

Implications for calculating holiday pay

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:

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

 

Below is a table showing some

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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the correct reference period for averaging pay?

The ERA uses a reference period of the 12 working weeks immediately preceding the first day of leave to calculate pay where necessary.  It is now not clear if that is the appropriate reference period to comply with the Working Time Directive.

There is no simple answer, but to comply with the decisions in Lock and Williams the reference period must be a representative normal period, in other words, reflect normal working.  The ECJ did not take that suggestion forward, but ruled that holiday pay must correspond to the worker’s “normal remuneration” and it is for the national court to work that out by taking an average over a reference period that is “considered to be representative”.  The Advocate General in Lock suggested a reference period of one year.

The issue was not taken much further by the EAT in Bear Scotland.  It seems possible that the employment tribunals will have to deal with the reference period on a case by case basis as it is arguable that a 12 week reference period will not be appropriate in all circumstances.

Do these rules apply to the 5.6 weeks under the WTR or just the four weeks under the Working Time Directive?

Four weeks according to the prevailing view of the courts, most recently the EAT in Bear Scotland.

The EAT in Bear Scotland also suggested (albeit in obiter comments) that it is for employers to choose which type of leave is taken when (that is “Directive leave” or Regulation leave”).

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.

It should be noted that, when granting permission to appeal, the EAT described this point as “arguable as well as of public importance”.  The Union representing the Claimants in Hertel and AMEC has decided not to pursue an appeal however it is possible that the finding will be overturned in another case.

In light of this Employer’s may wish to consider paying holiday pay in accordance with the new regime from now onwards.  As things stand, once three months have elapsed without a worker making a claim, they will have lost their right to claim for any previous underpayments.

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.

Conclusion

This is a complex and rapidly changing area of law.  At present, much remains uncertain and it will not be possible to know how to deal with aspects of holiday pay for certain until further case law clarifies matters.

What does appear clear however is that the all recent case law states that holiday pay should be properly representative of a workers usual pay.  This is unlikely to change anytime soon accordingly employers who regularly pay employees less during periods of holiday that they would expect to pay if the employee was working will need to give this matter some serious consideration.

 

 

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