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How to avoid confusion when calculating holiday pay

Calculating the amount of pay an employee should receive when on holiday used to be fairly straightforward, with the exception of the interaction between holiday and sick pay. However, recent decisions have made the calculation of Holiday Pay a little more complicated.

[Updated in 2015]

When calculating employee holiday pay, the following elements should be included:

  • A week’s pay is calculated in accordance with the definition of a working week in the Employment Rights Act 1996, which says that a ‘working week’ includes basic pay and overtime only if this is contractual, i.e. it is specified in your employment contract

  • If you work with fixed hours and pay then the amount due for a weeks pay is the normal pay you receive for a weeks work

  • If you work with variable hours and pay (e.g. bonus, commission) then a weeks pay equals the average hourly rate over the preceding 12 weeks of pay multiplied by your normal working hours

  • If you work shifts a weeks pay equals your average weekly hours over the preceding 12 weeks of pay at your average hourly rate

  • If you work with no normal working hours a weeks pay is the average pay you received over the preceding 12 weeks (that were paid)

  • A week’s pay will generally not include benefits in kind – pension, car, health cover. Bonuses, if they are discretionary, may be excluded too. Any salary that is sacrificed through a ‘salary sacrifice’ scheme (e.g. childcare vouchers) may also not be included. Annual contractual bonuses may be included on a pro-rata basis if they are possible to quantify at the point of calculation.

When the Working Time Regulations were introduced in 1998, the Government at the time decided that a week’s pay (to determine and calculate holiday pay) should be calculated in line with the Employment Rights Act; and no other definition was used.

However, recent developments at Employment Tribunal have clouded matters.

  • In Neal v Freightliner Ltd 2013, the Judge said that all overtime – contractual and non-contractual, compulsory or voluntary and any shift premiums – should be included when calculating holiday pay (compulsory overtime is work that an employer can require the employee to do in addition to normal working hours. Guaranteed overtime is overtime the employee is contractually entitled to receive, and is required to do).

Mr Neal had complained that his holiday pay was calculated on the basis of his basic 7 hour shifts, though he usually worked at least 9 hour shifts. It was not entirely clear whether these extra hours were compulsory or voluntary and his contract stated he could be required to work overtime “when necessary”. He bought a claim for the extra holiday pay he felt he was entitled to under an ‘unauthorised’ deduction of wages laws. He had never worked a shift of 7 hours, he was always rostered for longer shifts.

The Tribunal said EU law requires that a worker’s holiday pay should include salary but also any element of remuneration “intrinsically linked” to the tasks required under the worker’s contract that he/she must do – including overtime where it is neither guaranteed or compulsory, and even where it is voluntary. The Tribunal felt that holiday pay should represent what the worker would have received had they been at work. So, if they regularly carry out overtime or receive unsocial hours shift allowances / premiums these additional payments need to be included.

The Judge ruled that the extra hours should be taken into account, by averaging his totally remuneration over the standard 12 week reference period. The Judge decided these ‘unlawful’ deductions had been in a series so the claim could be backdated to Mr Neal’s employment start date of 2007.

This decision was to be appealed but has been settled out of Court instead – and is not binding as it was only made at an Employment Tribunal – so nothing is certain for the future, until the final outcome.

Other recent decisions:

  • However, this decision comes on the back of a similar 2012 decision from the Supreme Court (after the case had been to the European Court of Justice) in British Airways Plc v Williams, involving pilot’s holiday pay. Their holiday pay is governed by Aviation legislation which is similar to the Working Time Regulations, but not the same. The Supreme Court said that pilot’s holiday pay should be calculated by assessing average payments made over a representative reference period, which must include their daily flying pay supplements. The Court said that holiday pay must “correspond to the normal remuneration received by the worker”.

  • Recently, John Lewis Plc agreed to pay out to staff back-dated holiday pay to the tune of £40 million – although it is not known if this was prompted by Neal v Freightliner or not.

  • In Lock v British Gas, Mr Lock was a salesman whose pay consisted of basic pay and commission. The commission fluctuated (based on sales achieved) but on average it accounted for 60% of his pay. He only received basic pay while taking holidays. The Advocate General agreed Mr Lock’s holiday pay should include an average sales commission and recommended this decision to the ECJ who in May 2014 agreed. The Court said that any “aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out…. and in respect of which a monetary amount is provided must be taken into account” for the purposes of calculating holiday pay. This is to ensure that workers are not deterred from taking leave because they could not afford to do so. The ECJ added that a national court should determine the method of calculating the average Sales Commission. (The Advocate General said that Mr Lock’s average Sales Commission over the last 12 months appeared to be an appropriate amount that should be included in his holiday pay.

  • In Elms v Balfour Beatty Utilities Solutions Ltd in 2013 an employment tribunal has found that worker’s holiday pay should be calculated only with reference to his or her basic pay, excluding overtime pay, discretionary bonuses and allowances. This decision is being appealed.

  • In Summer 2014 the Employment Appeal Tribunal heard 3 other cases – Bear Scotland Ltd v Fulton; Hertel (UK) Ltd v Wood; Amec Group Ltd v Law – the claimants successfully argued in their employment tribunals that their employers should have included regular, but non-contractual, overtime in their holiday pay. The decisions were given at the end of 2014 and you can read the details here.

This does suggest that the UK may be heading towards calculating workers holiday pay by looking at their average earnings in the 12 weeks leading up to their holiday. And we wait to see the latest outcome of the Lock v British Gas with regard to how to calculate the average Sales commission to be included in the annual leave payments. But, watch this space…

Other points to consider

  • Employees who wish to claim for holiday pay they believe they may be owed would need to make a claim for an ‘unauthorised’ deduction of wages to an Employment Tribunal

  • The current decision only applies to the first 4 weeks of holiday (that is guaranteed under EU law). It does not apply to the additional 1.6 weeks leave that is granted under UK law. How complicated!

  • It is probable that only current workers and recent leavers could make a Tribunal claim (as tribunal claims normally must be bought within 3 months of the underpayment).

See our updated post on this subject here.

If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to Lesley at The HR Kiosk – a Human Resources Consultancy for small businesses – our fees are low to reflect the pressures on small businesses and you can hire us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.

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