Should UK employers calculate holiday pay differently? Should UK employers calculate holiday pay differently?

Should UK employers calculate holiday pay differently?
31 May 2015

There is clear judicial guidance now that employers who regularly pay overtime, commission and other allowances, should consider whether they are complying with their obligations under the Working Time Directive and the Working Time Regulations 1998 when it comes to calculating holiday pay?

It appears that many employers are waiting for further guidance before reacting to the proposition that in certain cases, employees should receive an average of these supplemental payments as well as basic salary when on holiday..

At the time of writing, the Employment Tribunal decision in the case of Lock v British Gas Trading Limited is awaited. Employers and practitioners are hopeful for guidance on calculating holiday pay in commission cases, in particular what reference period might be appropriate..

This article sets out a summary of the key aspects of the current holiday pay cases when considering an audit to determine risk in respect of holiday pay

How should holiday pay be calculated?

The Working Time Directive requires ‘normal remuneration’ to be paid during statutory annual leave. Normal remuneration means pay ‘normally received’. Payment has to be made for a sufficient period to qualify as ‘normal’. It can be difficult to determine whether payments other than basic salary are normally received, particularly where they fluctuate throughout the year. They may be seasonal or linked to year-end. It can be difficult to determine whether they are normally received for the purposes of the Directive.

Where there is a settled pattern of work, it should be easy to clarify what is normal. Where there is no settled pattern, employers can consider taking ‘an average over a reference period determined by national legislation’. Fundamentally, there should be an intrinsic or direct link between the payment and the work that the worker is required to carry out under the contract.

Finance teams will play an important role in an employer’s audit in identifying the cost per annum of additional emoluments paid under the employment contract, the frequency with which they are paid and to what extent they are performance related or simply expenses.

Overtime

Following Bamsey, guaranteed compulsory overtime is to be considered as ‘normal working hours’ under the Employment Rights Act 2006 and therefore included in holiday pay in respect of the full 5.6 weeks. Guaranteed compulsory overtime is paid where the employer is obliged to pay overtime even if the employee hasn’t worked it. The 2004 Court of Appeal decision in Bamsey held that such overtime must be included in holiday payments in respect of the full statutory holiday payable under the Working Time Regulations 1998 and this decision is unvaried by the recent Bear Scotland decision.

The position is unclear with regard to voluntary overtime, but non-guaranteed overtime required by the employer is to be taken into account. Voluntary overtime is where there is no obligation on either employee or employer to work or provide it. Non-guaranteed overtime is slightly different - the employee must work it, but only if it is offered.

Following Bear Scotland, non-guaranteed overtime was included in calculating holiday pay, but only where it was considered part of ‘normal remuneration’ (eg pay normally received) and payment has been made for a sufficient period to qualify as normal. If the payments meet these first two hurdles, the next step for the employer is to determine the appropriate reference period. Good legal advice can assist an employer with these steps.

Voluntary overtime is in doubt, but may still form part of ‘normal remuneration’ if a settled pattern develops over a sufficient period of time. Judicial guidance is lacking in this area.

Commission

Lock is a case concerning commission payments, in which a reference was made to Europe in 2014. Europe concluded that commission may be included in calculation for the statutory four weeks’ holiday pay derived under the EU Working Time Directive provided that the commission is ‘intrinsically linked to performance of tasks under the employment contract’.

The focus of this case was to ensure holiday pay reflected normal pay, otherwise the employee would lack incentive to take his annual leave. In Lock’s case, average commission earned over a representative reference period is the subject of the current Employment Tribunal decision. Employers may need legal advice how this judicial decision applies to any commission paid to their employees.

Other payments

Williams is the seminal case for determining whether other payments might fall into the category of normal pay if they are linked to performance of tasks under the contract. It concerned payments made to pilots while flying, which were normally received except when the pilot took annual leave.

Those payments which are ‘intended exclusively to cover occasions of ancillary costs’, eg travel and subsistence expenses which reimburse workers for costs are excluded. Conversely, allowances for performing certain tasks or performing them under certain conditions or times should be included, for example, Sunday supplements or travelling time payments.

Bonuses

At present, there is only an employment tribunal decision (Hertel) determining whether certain bonuses should be regarded as normal remuneration for holiday pay purposes. In Hertel, the bonuses in question were paid weekly or monthly and were certainly linked to performance. The facts of the case are relevant, rather than treating the decision as decisive with regard to inclusion of bonuses in holiday pay calculations. The decision is also unchallenged, but still a first instance decision. Without a judicial guidance from a more senior court, employers will need to carefully consider whether bonuses are ‘normal remuneration’. Are you at risk?

Employers are therefore advised to take legal advice in respect of audits, which will identify employees and workers who are entitled to overtime, bonus, commission and other additional payments. Such audits will additionally look for holiday patterns to ascertain whether the employer has any potential defence to holiday pay claims if brought.

Other considerations will include whether the contract should be amended and balance the risk of not amending the contract with creating a contractual right to higher level of holiday pay.

Case references:

• Bamsey v Albon Engineering and Manufacturing plc [2004]
• Williams & Others v BA [2012] (ECJ)
• Lock v British Gas Trading Limited [2014] (ECJ)
• Wood v Hertel (UK) Limited [2012] (Employment Tribunal)
• Bear Scotland and Hertel [2014] (EAT)

By Emma Barlett, partner, Charles Russell Speechlys LLP.

There is clear judicial guidance now that employers who regularly pay overtime, commission and other allowances, should consider whether they are complying with their obligations under the Working Time Directive and the Working Time Regulations 1998 when it comes to calculating holiday pay?

It appears that many employers are waiting for further guidance before reacting to the proposition that in certain cases, employees should receive an average of these supplemental payments as well as basic salary when on holiday..

At the time of writing, the Employment Tribunal decision in the case of Lock v British Gas Trading Limited is awaited. Employers and practitioners are hopeful for guidance on calculating holiday pay in commission cases, in particular what reference period might be appropriate..

This article sets out a summary of the key aspects of the current holiday pay cases when considering an audit to determine risk in respect of holiday pay

How should holiday pay be calculated?

The Working Time Directive requires ‘normal remuneration’ to be paid during statutory annual leave. Normal remuneration means pay ‘normally received’. Payment has to be made for a sufficient period to qualify as ‘normal’. It can be difficult to determine whether payments other than basic salary are normally received, particularly where they fluctuate throughout the year. They may be seasonal or linked to year-end. It can be difficult to determine whether they are normally received for the purposes of the Directive.

Where there is a settled pattern of work, it should be easy to clarify what is normal. Where there is no settled pattern, employers can consider taking ‘an average over a reference period determined by national legislation’. Fundamentally, there should be an intrinsic or direct link between the payment and the work that the worker is required to carry out under the contract.

Finance teams will play an important role in an employer’s audit in identifying the cost per annum of additional emoluments paid under the employment contract, the frequency with which they are paid and to what extent they are performance related or simply expenses.

Overtime

Following Bamsey, guaranteed compulsory overtime is to be considered as ‘normal working hours’ under the Employment Rights Act 2006 and therefore included in holiday pay in respect of the full 5.6 weeks. Guaranteed compulsory overtime is paid where the employer is obliged to pay overtime even if the employee hasn’t worked it. The 2004 Court of Appeal decision in Bamsey held that such overtime must be included in holiday payments in respect of the full statutory holiday payable under the Working Time Regulations 1998 and this decision is unvaried by the recent Bear Scotland decision.

The position is unclear with regard to voluntary overtime, but non-guaranteed overtime required by the employer is to be taken into account. Voluntary overtime is where there is no obligation on either employee or employer to work or provide it. Non-guaranteed overtime is slightly different - the employee must work it, but only if it is offered.

Following Bear Scotland, non-guaranteed overtime was included in calculating holiday pay, but only where it was considered part of ‘normal remuneration’ (eg pay normally received) and payment has been made for a sufficient period to qualify as normal. If the payments meet these first two hurdles, the next step for the employer is to determine the appropriate reference period. Good legal advice can assist an employer with these steps.

Voluntary overtime is in doubt, but may still form part of ‘normal remuneration’ if a settled pattern develops over a sufficient period of time. Judicial guidance is lacking in this area.

Commission

Lock is a case concerning commission payments, in which a reference was made to Europe in 2014. Europe concluded that commission may be included in calculation for the statutory four weeks’ holiday pay derived under the EU Working Time Directive provided that the commission is ‘intrinsically linked to performance of tasks under the employment contract’.

The focus of this case was to ensure holiday pay reflected normal pay, otherwise the employee would lack incentive to take his annual leave. In Lock’s case, average commission earned over a representative reference period is the subject of the current Employment Tribunal decision. Employers may need legal advice how this judicial decision applies to any commission paid to their employees.

Other payments

Williams is the seminal case for determining whether other payments might fall into the category of normal pay if they are linked to performance of tasks under the contract. It concerned payments made to pilots while flying, which were normally received except when the pilot took annual leave.

Those payments which are ‘intended exclusively to cover occasions of ancillary costs’, eg travel and subsistence expenses which reimburse workers for costs are excluded. Conversely, allowances for performing certain tasks or performing them under certain conditions or times should be included, for example, Sunday supplements or travelling time payments.

Bonuses

At present, there is only an employment tribunal decision (Hertel) determining whether certain bonuses should be regarded as normal remuneration for holiday pay purposes. In Hertel, the bonuses in question were paid weekly or monthly and were certainly linked to performance. The facts of the case are relevant, rather than treating the decision as decisive with regard to inclusion of bonuses in holiday pay calculations. The decision is also unchallenged, but still a first instance decision. Without a judicial guidance from a more senior court, employers will need to carefully consider whether bonuses are ‘normal remuneration’. Are you at risk?

Employers are therefore advised to take legal advice in respect of audits, which will identify employees and workers who are entitled to overtime, bonus, commission and other additional payments. Such audits will additionally look for holiday patterns to ascertain whether the employer has any potential defence to holiday pay claims if brought.

Other considerations will include whether the contract should be amended and balance the risk of not amending the contract with creating a contractual right to higher level of holiday pay.

Case references:

• Bamsey v Albon Engineering and Manufacturing plc [2004]
• Williams & Others v BA [2012] (ECJ)
• Lock v British Gas Trading Limited [2014] (ECJ)
• Wood v Hertel (UK) Limited [2012] (Employment Tribunal)
• Bear Scotland and Hertel [2014] (EAT)

By Emma Barlett, partner, Charles Russell Speechlys LLP.