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Holiday Pay Warning – Are you paying the correct amount?

A number of recent case-law judgements have suggested a shift in the law in favour of employees receiving enhanced pay whilst on holiday. Basic pay no longer cuts the mustard in some cases.

This development could have a significant impact on the way you run your business, especially if you employ staff with irregular hours, overtime or operate a commission structure. This could be the most fundamental change to the employment law landscape since auto enrolment.

The Holiday Pay Legislation

Article 7 of the Working Time Directive stipulates that employees are entitled to four weeks’ paid leave per annum.

This Directive is implemented into UK law via Regulation 16 of the Working Time Regulations 1998. Employees should therefore receive a weeks’ pay for each weeks’ leave, calculated in accordance with the Employment Rights Act 1996 (ERA).

According to Section 221 of the ERA, an employee who works normal hours is entitled to receive his normal basic weekly pay whilst on holiday. Where the employee works irregular hours, he or she is entitled to be paid his or her average pay over a 12 week reference period.

If an employer and employee have mutual contractual duties to provide and accept overtime, then normal hours under s.221 would include overtime worked. The same principle applies to commissions.

On this basis, the statutory position is that employers do not need to take into account overtime for employees when calculating holiday pay, unless that overtime is contractually guaranteed, in which case it becomes part of their basic pay and should be paid whilst on holiday.

The Case-law – A Different Story

In BA plc v Williams, the Supreme Court held that an employee’s/worker’s normal remuneration includes pay “intrinsically linked to the performance of their tasks”. For example, if an employee always received a performance bonus/incentive/allowance for completing tasks whilst at work, such a bonus should be received whilst on holiday, regardless of whether the employee can achieve their usual performance.

In Neal v Freightliner Ltd it was held by the Employment Tribunal that an employee’s/worker’s holiday pay should take into account overtime payments. Thus where an employee receives regular overtime pay, he/she should be paid this during holiday and should not be penalised for taking time off.

In Lock v British Gas Trading Limited the Court of Justice of the European Union held that holiday pay should include commission when that commission forms part of the employee’s or worker’s normal remuneration. Again the rationale behind this is that an employee should not be penalised for taking holiday by receiving less than his or her normal wages, either by reference to regular commissions or average commission over a reference period.

In Fulton v Bear Scotland Ltd, the Employment Tribunal ruled that an employee’s/worker’s pay should include overtime, standby and emergency call out supplements. This case has been joined with Neal v Freightliner Ltd and is due to be heard by the Employment Appeal Tribunal later in July 2014.

The Theory

As above, a reduction in an employee’s/worker’s remuneration that is likely to deter them from using their right to take annual leave is contrary to the objective of the Working Time Directive and therefore the Working Time Regulations.

Whilst an employee that sometimes receives commission/bonus/overtime may not be entitled to be paid inclusive whilst on holiday, if they normally receive such additional payments or receive enhanced pay over a 12 week average, the case law suggests that employers may have to pay employees an enhanced rate during holidays, starting now.

There is no statutory requirement that stipulates that enhanced payments should be made, yet. It is likely that legislation will be introduced in the UK following the decision of the CJEU in Lock and the EAT’s decision regarding Fulton and Neal later this month. Employers may notice that their employees become uneasy about receiving basic pay during holidays and if large workforces become knowledgeable of the courts’ attitude towards overtime/bonus, it could result in substantial holiday pay litigation. Potentially these claims could run back a number of years, all the way back to 1998 however it is unclear at present whether this will happen.

The Options

Holiday pay ought to be on employers’ radars if it is not already. Some employers may face a potentially significant liability if they are required to pay some or all of their employees’ bonus, commission, night shift premiums, and accommodation allowance etc during holidays.

The first step for employers ought to be a thorough review of their workforce bonus, overtime and payment structure with a view to working out their liability to pay staff a ‘holiday uplift’ from today’s date.

The second step ought to be a retrospective calculation, to work out any historical liability an employer may face in the unlikely event that legislation is introduced with a retrospective effect.

If employers are currently considering entering into new contracts or reviewing bonus/overtime/pay terms, holiday pay should be at the top of their agenda to ensure that matters are dealt with sooner rather than later.

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David Ward

Associate Solicitor
Employment Law
0113 227 9262
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David Ward Blacks Solicitors LLP