Insights

Holiday Pay Calculations

Written by Laura Rooney
22/12/2014

In 2013, John Lewis and Waitrose made the surprising announcement that they would be paying £40 million to staff in settlement of historic errors relating to holiday pay calculations. Since then we have had a spate of European and UK judgments which have confirmed that elements of a worker’s remuneration such as commission and overtime should be included in the calculation of holiday pay. Most employers currently calculate holiday pay based on a worker’s basic pay, so this could have a big impact on some employers. We have recently been helping a number of employer clients get to grips with this change.

Recent Changes

Under the Working Time Regulations 1998 (‘WTR’), workers are entitled to 5.6 weeks’ statutory paid annual leave. This consists of four weeks’ leave under the EU’s Working Time Directive (‘WTD Leave’) and an additional 1.6 weeks’ leave (‘Additional Leave’) under domestic legislation. Workers are entitled to be paid their ’normal pay’ for WTD Leave. In British Airways v Williams, the Court of Justice of the European Union (CJEU) ruled that ‘normal pay’ should include all elements of a worker’s salary that:

  • are ‘intrinsically or directly linked‘ to the performance of the worker’s tasks that they are required to carry out; or
  • relate to their ‘personal or professional status‘.

We now have some certainty as to the elements of pay that should be included in holiday pay:

  • commission payments
  • guaranteed overtime
  • non-guaranteed overtime which a worker is obliged to do if offered
  • productivity/performance bonuses
  • travel time payments (not expenses)
  • shift premiums
  • seniority payments (linked to a worker’s qualifications)
  • standby/call-out payments

How should holiday pay be calculated?

Domestic legislation stipulates a 12-week reference period to calculate a worker’s average pay where they do not work regular hours. However this may cause savvy workers to take time off following busy periods at work e.g., a retail worker doing increased overtime over Christmas would have a higher average salary and therefore entitled to more holiday pay if they take annual leave in January. The Attorney-General has suggested that a 12-month reference period would be more appropriate but this issue will be considered in the UK in February 2015 by the Leicester Employment Tribunal in the case of Lock v British Gas. Until we have a definitive decision, we suggest the 12-week reference period should continue to be used. The practicalities of making correct payments to workers for holiday pay may be complex. It may be that payroll software can make these calculations automatically but an employer’s process for capturing a worker’s overtime, commission and other elements of pay may need to be reviewed. These recent decisions only affect WTD Leave and not Additional Leave, leaving employers with the administrative burden of varying rates of holiday pay.

What about historic liabilities?

In principle, a worker can claim for a series of unlawful deductions and it has been suggested that workers may be able to claim for deductions dating back to the introduction of the WTR. However, in Bear Scotland Ltd v Fulton the Employment Appeal Tribunal (EAT) ruled that where there is a gap of more than three months separating periods of holiday, this breaks the series and employees cannot bring a claim in respect of any earlier deductions. The EAT also said that due to the distinction between WTR Leave and Additional Leave, an employer could decide when a worker takes WTR Leave. By requiring employees to take WTR Leave at the start of the year before Additional Leave, this may also mean that many potential claims are out of time. The EAT’s attempt to limit historic liabilities is welcome news for employers. However, the EAT has granted permission to appeal to the Court of Appeal on this point.

The Future

February’s hearing in Lock v British Gas will hopefully provide some certainty as to the appropriate reference period for calculating average pay.

Watch this space!

We await the appeal in Fulton regarding historic liabilities. Further clarity is required in relation to voluntary overtime that an employer is not obliged to offer and the employee does not have to accept, but which is regularly worked. Commentary suggests that regular voluntary overtime should be included in holiday pay because a worker’s “normal” pay will have been established through a pattern of regular payments. It is likely that there will be a test case to consider this point in due course.

Contact the Author

Laura Rooney

Gordon Dadds