Holiday Pay – Latest Rulings

There have been recent cases on the subject of holidays and the need to comply with EU law, specifically the Working Time Directive.

Overtime

In Dudley Metropolitan Borough Council v Willetts, the Employment Appeal Tribunal (EAT) held that voluntary overtime that is normally worked should be included when calculating an employee’s holiday pay.

In recent years, there have been several high-profile cases that have considered how employers should calculate statutory holiday pay for their workers, and to what extent employers should take account of variable payments, such as commission and overtime. The extent to which overtime should be included has been particularly problematic, with Tribunals drawing distinctions between different types of overtime.

According to EU law, workers should take their full holiday entitlement; getting ‘normal remuneration’ while on paid leave to ensure that workers are not put off taking holidays by receiving less than their normal pay during this time.

Mr Willetts, on behalf of 56 employees who worked for the Council as tradespeople, brought claims for unlawful deduction of wages. The employees were contracted to work 37 hours per week, with many having an additional right to work overtime. The employees also performed additional voluntary duties, such as working out-of-hours, standby shifts, attending call-outs and working voluntary overtime, for which they received additional payments. Their earnings for this additional voluntary work could amount to around £6,000 a year on top of their basic salary.

The Employment Tribunal held that the payments were intrinsically linked to the performance of the employees’ duties, and that they performed the duties with sufficient regularity for the payments to be considered ‘normal remuneration’.

The EAT dismissed the Council’s appeal. It noted that the ECJ, in a previous case, had set down the overarching principle that holiday pay should correspond to ‘normal remuneration’, so as not to dissuade workers from taking leave; and that the division of pay into different elements cannot affect a worker’s right in this regard. For a payment to count as ‘normal’, it must have been paid over a sufficient period of time.

The question in every case, irrespective of the label put on the payment, is whether the payment forms part of the worker’s ‘normal remuneration’. Voluntary overtime that satisfies this test must be included in holiday pay.

Implications

The EAT’s reasoning provides helpful guidance on when voluntary overtime should be included in the calculation of holiday pay:

  • EU law requires that ‘normal’ (and not contractual) remuneration must be maintained in respect of the four week period of annual leave.
  • For a payment to count as ‘normal’ it must have been paid on a regular and/or recurring basis, which is a question of fact and degree in each case.
  • Items that are not usually paid, or are exceptional are not ‘normal pay’.

This is the first binding decision on the issue, providing clear guidance that regular voluntary overtime should be included within the payment for the first four weeks of statutory holiday. It does not have to be included in the holiday pay for the additional 1.6 weeks of holiday provided for under the Working Time Regulations, or any additional contractual holiday that an employer provides, unless this is stated in the contract.

The outcome is not surprising given the case law on other variable payments, such as commission.

In another recent judgment, an Employment Tribunal in Flowers & Others v East of England Ambulance Trust held that ambulance workers’ compulsory overtime in respect of “shift overruns” should be included in the calculation of their holiday pay, but that on the facts of this case purely, voluntary overtime did not have to be included. It is likely that their voluntary overtime was not that regular, so not comparable with the overtime worked by the tradespeople in the Willets case.

Employers, who pay voluntary overtime, as well as stand-by payments, call-out payments, or payments for other forms of voluntary work, should now consider how they will adjust their payroll systems to calculate holiday pay correctly. It remains to be seen, however, how frequently overtime has to be worked before it becomes “normally worked” and that is not likely to become clear until we have further case law.

Actions to now consider

  • Ask: What would the worker have earned if they had not taken leave?
  • Review the regularity with which workers receive these payments to see if there is a discernible pattern, as well as considering the total value of the additional payments over the course of the holiday year.
  • Where there is a discernible, regular pattern of payments, or where the total value of the payments is sufficient to materially impact the worker’s holiday pay over the course of the year, re-calculate average holiday pay.
  • Decide on which relevant timeframe will you use for such calculations, the last 12 weeks/3 months, or based on last year’s P60 earnings.
  • Consider if enhanced average holiday pay calculations will be applicable just on the first four weeks, or for all holidays (including Public Holidays), or all holidays. If the former, clearly express this in your contracts.

Commission

Much the same approach should be taken with commission, as the Supreme Court have refused permission to British Gas to challenge the Court of Appeal’s decision, that results-based commission payments must be included in the calculation of holiday pay for the basic four weeks’ annual leave provided by the Working Time Regulations (WTR). The Court was, however, unwilling to extend the principle to situations other than those involving contractual, results-based commission.

The Court decision in this case, therefore, clarifies the position only with regard to a specific type of commission – that is, contractual, results-based commission. Employees who earn other kinds of commission will, therefore, have to persuade their employers that their situation is really no different from that of the sales people at British Gas, or will have to bring proceedings of their own. This means continued uncertainty for employers over this long running problem. While most businesses won’t be affected, those that engage workers on a commission-only basis, or on other non-standard contracts, and do not provide for paid holiday, may be hit hard, but need to take action sooner rather than later. The limit on back pay claims to two years does at least mean that employers can assess their potential exposure, and make appropriate provision.

Finally, it is worth remembering that if an employee earns commission and/or bonuses regularly, i.e. every pay interval, regardless of whether payment is down to individual or team performance, it is likely to form part of the definition of ‘normal remuneration’, so will also need to be included in the average holiday pay calculations.

Holiday not taken

A British case is making its way through the European courts system as to whether workers are entitled to carry forward, from one year to the next, holiday that they have been unable to take for reasons beyond their control. The matter was referred to the CJEU, and the opinion given by Advocate General Tanchev said:

  1. Employers must provide adequate facilities for their workers to exercise their right to take holiday, and workers should not be compelled to take legal action in order to establish this right.
  2. If a worker does not take holiday because they will not be paid for it, then this is being ‘prevented’ from taking it and the right carries over until they are given a facility to take the paid holiday or leave, whichever is earliest.
  3. A worker prevented from taking leave can, on termination, claim backdated holiday pay for the whole of their employment.
  4. The worker does not have to take the leave first, before being able to establish whether they are entitled to be paid for it.

Opinion from the Advocate General is not binding, but is usually followed by the ECJ’s judges, who are now deliberating their decision, and will give their ruling later this year. After this, the case will return to the UK’s Court of Appeal, which will decide what should be done in this case, in light of what the ECJ has said.

It will impact those on long term sickness, and people who have been categorised as self-employed, but are later found to be workers or employees, who will be entitled to holiday pay for the duration of their engagement/employment (assuming the ECJ follows the Advocate General’s opinion). However, because it is a decision on EU law, it will only apply to the four weeks’ paid leave provided under the EU Working Time Directive, and not the additional eight days provided by the UK Working Time Regulations.

Whilst UK law limits such claims to two years, and assumes this will not be unbroken by more than three months – if the ECJ follows the Attorney General’s opinion, this restriction may not be incompatible with this decision. UK law states that a gap of over three months between deductions will break the chain of causation, and claims issued on or after 8 January 2015 are prevented from going back more than two years from the date of issue. If this opinion is followed by the ECJ, UK law may need to be changed.

In practical terms, clients should adopt a cautious but pragmatic approach to holiday carry over, after taking advice from their Consultant, on the particular case.

Employers can choose to continue to adopt a ‘wait and see’ approach to average holiday pay, but we would strongly advocate taking a more proactive approach to making changes, calculated in a way that suits their organisation.

 

Clients are welcome to raise concerns with their Consultant who will be pleased to advise you on any element of the issues arising from this newsletter.