How much should you pay your staff when they are on holiday? Should you pay them their basic salary only? Or should you include commission, overtime or bonuses? And how should this be calculated?

We explain the ins and outs of holiday pay in light of the recent court decisions making the news.

The starting point

The entitlement of workers to paid annual leave is set out in the Working Time Regulations 1998. These give workers a basic entitlement to 5.6 weeks’ holiday. This exceeds the European minimum of 4 weeks.

For each week’s holiday, the WTR states, workers should be given a ‘week’s pay’.

But what is a ‘week’s pay’? The WTR refers to the complicated methods of calculating a week’s pay set out in Employment Rights Act 1996 and deal with various situations. The two basic situations are where there are ‘normal’ working hours and where there are not. Where there are no normal working hours, an average should be taken of remuneration over a reference period of 12 working weeks.

Where there are ‘normal’ hours, the position in the ERA 1996 is that usually only basic pay should be taken into account. This would rule out payments for commission, bonus, overtime etc. where these are not contractual.

Challenge from Europe

The basic position in UK law has, over several years now, been gradually challenged and eroded away by EU law. Employment tribunals and higher courts have been willing to read extra words into UK legislation where this is necessary to implement EU law.

The first key departure from the basic position in UK law came in the case of Williams v. British Airways in 2010. This case related to flight allowances, which we deal with separately below, and established the principle that pilots (and therefore other workers) should be entitled to holiday pay in respect of:

• Remuneration intrinsically linked to the performance of employment duties.
• In other words, holiday pay must correspond to “normal remuneration”.

Taking this principle, a number of cases have dealt with specific scenarios, and we take these in turn below.

As it is European, some of the language is somewhat woolly, unfortunately. This means that the scenarios set out below provide general guidance only, and each particular situation should be looked at individually.

So, what should be included in holiday pay, and what should not?

Payments relating to professional or personal status

These should be included (Williams v. British Airways).

Ancillary costs (expenses)

These do not need to be included where they are expenses incurred because of work (Williams v. British Airways).

Allowances

These should be included where they do not cover ancillary costs (e.g. expenses related to travel or subsistence). In the case of Williams v. British Airways, a travel allowance was made to pilots when they were actually flying. These allowances were payable because they were more in the nature of a bonus for performing certain tasks, and therefore intrinsically linked to them. Where these are more analogous to a travelling expense (as in the case of Wood v. Hertel) they should not be included.

Time spent travelling to work

Payment for time spent travelling should be included, so long as it is not an expense ancillary to travel such as train ticket or bus fare would be. (Bear v. Fulton – EAT)

Commission

The case of Lock v. British Gas is authority for the rule that commission should be included in holiday pay.

The court held that the amount should be based on an average “over a reference period which is considered to be representative”. This leaves the actual method of calculation up in the air (see below).

Overtime pay

This should, as the law stands, generally be included. We need to sound a note of caution here, however, as some of the relevant cases are currently under appeal.

The recent case of Bear v. Fulton means that voluntary overtime needs to be paid where this is offered at the discretion of the employer, but when it is offered it needs to be worked.

The case of Wood v. Hertel confirms that compulsory overtime also needs to be taken into account.

The situation remains unclear however when it comes to purely voluntary overtime i.e. overtime that need not be worked and need not be offered.

Again, the situation is also unclear as to exactly how compensation for overtime should be calculated.

Bonuses

Applying the test that payments that are intrinsically linked to the performance of tasks under the contract should be included, it is probably the case that productivity, attendance or performance bonuses should be counted. Certainly, this was the case in Wood v. Hertel.

But where does this leave the annual discretionary bonus usually offered by the vast number of employers?

If this is a standard one-off payment simply relating to the time of year (e.g. Christmas) then it is probably not intrinsically linked to the performance of tasks. However, such bonuses are generally related to past performance, so there is a good chance that they should be included. We are awaiting confirmation of this point in future cases, however.

Standby and emergency call-out payments

These are intrinsically linked to the performance of tasks and therefore should probably be included (Bear v. Fulton – at tribunal level).

‘Acting up’ supplements

These should be probably be included, because they are intrinsically linked to the performance of tasks (Bear v. Fulton – at tribunal level).

How to calculate the amount of holiday pay owing

Unfortunately, it is not clear whether the 12 working weeks reference period set out in the ERA 1996 applies.

The reference period should be a representative normal period. 12 months was suggested by the Advocate General in Lock v. British Gas. On the other hand, some tribunals have taken the view that the original 12 week reference period is adequate.

Tribunals, and employers, will therefore need to approach this question on a case by case basis.

The rules apply to the European minimum 4 weeks’ leave only

If the rules only apply to 4 out of the compulsory 5.6 weeks, which 4 weeks is it; the first 4 weeks or the last? This is highly relevant to the amounts to be paid, because, for instance, workers will want the weeks nearest their highest periods of commission to count.

The employment tribunal in Wood v. Hertel took the view that it should be up to workers to choose, but this does not seem just, was only an employment tribunal decision and is very open to challenge.

Back-pay

So, how far back can claims for underpaid holiday go?

Unfortunately we have no clear guidance on this point either. Arguably, claims could go back to the implementation of the WTR on 1 October 1998. This is because repeated under-payments of holiday pay can be seen as unlawful deductions from wages, and part of a “series of deductions” stretching all the way back to the implementation of the legislation.

Another option would be to limit back-claims to 6 years, which is the normal limitation period for claims in England and Wales.

The Employment Appeal Tribunal in Bear v. Fulton took a different approach, much more favourable to employers, saying that a “series of deductions” will come to an end if there is more than 3 months (the normal limitation period for tribunal claims) between holiday periods. This is open to challenge and will be subject of a further appeal, leaving this issue up in the air.

What should employers do about back-pay?

One way of dealing with the series of deductions point is to break the series of deductions by starting to make payments now. This may alert employees to the existence of the right, however, and precipitate back-claims. Where the series of deductions has been broken in this way, the 3 month time period for bringing a claim will certainly apply.

What should employees do?

Employees should bring their claims as soon as possible, so as to prevent their employers from bringing any series of deductions to an end. They should apply for their claim to be stayed pending the further appeals in Bear v. Fulton.

These issues are extremely significant for employers and employees alike. If you would like to discuss them with an experienced employment law solicitor, please give us a call and we would be delighted to help.