There have been a few recent decisions which could have far reaching consequences for employers when calculating holiday. This ticking time bomb means that many employers who calculate holiday pay based on basic salary alone may have to increase the amount of holiday pay they pay their employees.
Under the Working Time Regulations 1998 (WTR) all UK workers are entitled to receive a minimum of 28 days paid holiday per year, including the usual 8 bank holidays. However recent disputes have arisen over how that holiday pay should be calculated. Is it just basic pay or should it include other elements such as overtime or commission?
The start of the problem the problem for employers came in Williams v British Airways (2011) when the European Court of Justice (ECJ) held that workers’ holiday pay should be based on their ‘normal remuneration’ and therefore include anything that is ‘intrinsically linked’ to the performance of their job. In Mr Williams’ case, as an airline pilot this meant that allowances linked to flying should be included when calculating his holiday pay and it was not enough that his holiday pay was based on only his basic salary.
In Lock v British Gas (2014) Mr Lock was a sales consultant who received basic pay, plus commission on his sales. Although his commission payments made up to 60% of his pay, when Mr Lock was on holiday he was only paid basic salary. The ECJ held that holiday pay should be based on a workers ‘normal remuneration’ and that any reduction in pay for a worker when taking holiday could deter them from exercising their right to that holiday. In Mr Lock’s case it was found that his commission payments were directly linked to the performance of his job and should be taken into account when calculating his holiday pay.
The developing case law has been applied by UK Employment Tribunals to mean that workers who undertake voluntary overtime are entitled to have that reflected in the calculation of their holiday pay and simply paying them basic pay was not sufficient. A number of these Tribunal decisions have been appealed and the outcome of that appeal is expected to be published any time now. Until that date, employers will not know for definite whether all overtime payments must be included when calculating a workers holiday pay. However, there is a real possibility that appeal courts will hold that it should and employers need to start thinking about this issue now – see our actions points section below.
Any workers whose pay is made up of voluntary overtime ( i.e. not guaranteed by the employer), commission payments or other allowances ‘intrinsic’ to their duties may be entitled to receive holiday pay calculated to include those payments rather than just their basic pay. A failure to pay the correct amount of holiday pay to a worker entitles the individual to bring an unlawful deduction from wages claims against their employer. Such a claim could extend to underpayments going back several years and employers should not ignore this issue as it could prove to be expensive.
In 2013 it was reported that John Lewis group made one off payments to staff totalling £40 million following an error in how holiday pay was calculated. While this was apparently related to whether John Lewis should have taken into account additional pay for time worked on Sundays and bank holidays, it shows the legal technicalities of how holiday pay is calculated are very much in the spotlight.
Action points
- Assess your workforce to see if any worker’s remuneration includes voluntary overtime, commission payments or other allowances which are an ‘intrinsic’ part of their job.
- If they do include any of these elements, work out how much it would cost to pay each worker holiday pay based on their ‘normal remuneration.’
- Find out if your payroll department can undertake the necessary calculations; for example the amount of overtime worked or commission earned and its value in a 12 week period.
- Consider whether it is possible to start paying such workers holiday pay which includes overtime and commission payments etc. as a way of preventing workers further liability from being incurred.
- Seek specialist legal advice as this matter is complex and the legal position is evolving.
If you think you have an issue with calculation of your empoyees’ holiday pay get in touch with one of Integra’s employment law solicitors at contact@integralegal.co.uk or 0115 987 6790.