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Holiday pay – where are we now?

24/06/2015 | Andrea London

Entitlement to holiday pay

Article 7 of the EU Working Time Directive 2003/88/EC (the “WTD”) states that:

“Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks…” (Basic Annual Leave)

Domestically, the Working Time Regulations 1998 (the “WTR”) and the Employment Rights Act 1996 (the “ERA”) seek to give effect to this requirement.  However, recent case law has called into question the method of calculating holiday pay under the ERA and the elements that should be included when calculating an employee’s holiday pay for the purposes of their Basic Annual Leave (the basic 4 week entitlement required by the WTD, and not the additional 1.6 weeks provided for by the WTR which is over and above that required under the WTD).

Recent case law has held that when calculating holiday pay during Basic Annual Leave, it should equate to the employee’s “normal remuneration”.  The key question is therefore what elements should be included within this, apart from basic salary?

1)     Obligation to pay commission

In Lock and Ors v British Gas Trading Limited ET/1900503/12 (“Lock”), the ECJ held that where a worker’s “normal remuneration” includes commission, that commission should be taken into account when calculating their holiday pay during Basic Annual Leave. The ECJ’s rationale was that an employee who is paid less during their holidays will suffer a disadvantage in exercising their right to take annual leave, since they would receive less money than if they had worked. It was stated that the calculation of holiday pay should therefore include the average commission earned during a “reference period which is considered representative”.

What is an appropriate “representative” reference period when calculating holiday pay for Basic Annual Leave?

It was suggested in Lock that to comply with the WTD, the reference period must be “representative”.  Consequently, it is now unclear whether the 12-week period which has been used in the ERA is appropriate.  Whilst it should be noted that the Advocate General in Lock suggested a reference period of 12 months, the ECJ decided that this was a matter to be decided by domestic courts. Employers must therefore be cautious to ensure that the time period is representative of the employee’s working conditions, particularly where these vary significantly from week to week or month to month.

2)     Obligation to include overtime and other payments

The later case of Bear Scotland Ltd & Ors v Fulton & Ors [2014] UKEAT(“Bear”) considered the inclusion of overtime and travel allowances in the calculation of holiday pay during Basic Annual Leave.

Compulsory overtime?

The EAT held that, there must be an intrinsic or direct link between the payment being claimed as holiday pay and the work the employee is required to carry out.

Therefore, where an employee is required (it is compulsory) to work overtime, it should be included in the calculation of holiday pay.  The overtime should however be worked regularly over a “sufficient period” so as to be included in the employee’s “normal remuneration”. The obligation to include overtime when assessing pay during Basic Annual Leave will therefore vary in respect of each individual employee and is likely to be decided on a case by case basis.

Voluntary overtime?

The tribunal in Bear left the issue in relation to voluntary overtime open as the question did not fall within its facts. Employers should not, however, assume that voluntary overtime will definitely be excluded when calculating holiday pay during Basic Annual Leave.  It is likely that uncertainty will remain in this area until it is dealt with in future cases.

Travel allowances?

It was decided by the EAT in Bear that travel allowances based on notional travel time (referred to in the case as a “Travelling Time Payment”) and distance travelled from home to work (referred to as a “Radius Allowance”) should be included within the remit of “normal remuneration”. It was stated that “HMRC treated some of the payment as a reimbursement of travelling costs, but the balance as taxable remuneration”. The taxable element formed part of the workers’ “normal remuneration” and should have been included in their holiday pay for Basic Annual Leave.

Productivity / performance based bonuses?

In Wood and others v Hertel (UK) Ltd and another ET/2603803/12 it was decided that productivity and performance bonuses (whether dependent on a group of employees or an individual) were intrinsically linked to the tasks of the employee and “the link is not made materially less intrinsic by the fact that part of it might, on occasion be withheld because of the conduct of others in the group”. Such bonuses will therefore form part of an employee’s “normal remuneration” and should be included in pay during Basic Annual Leave.

Discretionary bonuses?

Unfortunately, whether discretionary bonuses form part of an employee’s “normal remuneration” remains a grey area and will be left for the courts to decide in the future.

Limitation – how far back can underpayment claims go?

Employees can bring claims under the WTR and the ERA in relation to holiday payments owed.  Any claim under the WTR must be brought within three months of the specific underpayment, whereas a claim under the deduction from wages provisions of the ERA can be brought within three months of the last in a series of deductions.

Until recently there was concern that when claimed as a series of deductions, liability for underpaid holiday could therefore stretch back several years.  However, the recent implementation of the Deduction from Wages (Limitation) Regulations 2014 (“DFW”) means that claims for holiday pay brought (under the ERA) after 1 July 2015 will have a backstop date of two years.  Whilst claims brought before 1 July 2015 are not subject to any backstop date, employers can draw further comfort from the EAT’s decision in Bear, which confirmed that a gap of three months in an alleged series of underpaid holidays will “break the chain” and therefore limit such claims.

Can employees also bring a claim for breach of contract?

The DFW confirmed that regulation 16 of the WTR does not give employees a contractual right to paid leave. This amendment took effect from 8 January 2015 and was aimed at preventing employees from circumventing the DFW and the WTR by bringing a claim for breach of contract.

In view of this, employers should check the provisions and contractual rights contained within their employees’ contracts to assess whether they create an express or implied contractual right to have non-guaranteed overtime, commission and/or travel allowances included in holiday pay (giving employees six years in which to bring a claim).

Conclusion

It is important to emphasise again that case law only really affects the calculation of holiday pay during Basic Annual Leave.  The additional 1.6 weeks’ of leave provided by the WTR and/or any contractual entitlement to holiday over and above the Basic Annual Leave entitlement need not be paid on the basis of the additional elements noted above and can, if the contract of employment states, be paid on the basis of “basic salary” only.

Further, whilst recent case law and statutory amendments have brought some guidance, uncertainty remains about the extent to which certain payments such as voluntary overtime and discretionary bonuses should be included in holiday pay.  There is also uncertainty about the reference period over which holiday pay should be calculated.  Employers should seek legal advice if concerned.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Andrea London of these offices on 020 7955 1433 or by e-mail at andreal@rosenblatt-law.co.uk 

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