So after all the court cases, where do employers stand on holiday pay?

This article first appeared in HR news.

Employment tribunals continue to consider a number of cases concerning the inclusion of overtime, commission and other variable payments in holiday pay, as well as the entitlement to carry-over leave as a result of long-term sickness or where a worker has otherwise been unable to take it.

Unfortunately the position in many regards remains unhelpfully unclear for employers who do not want to fall foul of the requirements or face large backdated claims.  Here’s an update of the situation as it stands:

What should be included in the calculation of holiday pay?

ECJ case Williams v British Airways in 2010 confirmed that holiday pay should correspond to what is “normal remuneration” for the worker.  For British Airways pilots holiday pay included any remuneration linked “intrinsically” to the performance of contractual tasks and payments relating to professional or personal status.

Commission – definitely should be included in holiday pay

The worker in the Lock v British Gas case, received commission earned on sales and this made up 60% of his pay. He had normal working hours.  His commission did not vary according to the amount of work he did, but it varied in relation to successful sales achieved. He claimed that he was disadvantaged when on leave as he could not earn commission during those periods, resulting in lower earnings periods later.

The European Court held in 2014 that holiday pay should include commission or the worker would be deterred from taking leave because of the detrimental impact on pay.  This point has been followed by the English courts since and in February 2017, the Supreme Court refused British Gas permission to appeal further, so this point about commission is, at least, settled.

Overtime – settled patterns should be paid, less clear for other overtime

Guaranteed overtime is covered in “normal working hours” under the Employment Rights Act 1996 (ERA) and is therefore included in holiday pay calculations.  In November 2014, the EAT in the Bear Scotland consolidated cases held that holiday pay should include “non-guaranteed” overtime pay where the worker is obliged to work overtime if requested.  Such overtime should be paid if it is normally received by the worker and is a payment directly linked to the work.

To qualify as “normal” the payment must have been made for a sufficient period. This may be easily identified where there is a settled pattern of work but where there isn’t, it will be problematic to assess entitlement and calculation.

What remains unclear is the position on “voluntary” overtime.  Avoiding any “settled pattern” will be essential to avoid it becoming normal pay, with isolated instances being preferable.  It will be a question of fact in each case but two cases in 2016 held that working regular voluntary overtime was enough to be normal pay, despite the fact that the overtime pay varied each month.

Bonuses – regular bonuses should be paid

Productivity, attendance and performance bonuses intrinsically linked to the performance of a worker’s tasks should be included in holiday pay calculations.  Discretionary, one-off and company performance bonuses are a grey area.  Relevant will be whether there is a financial disincentive by the taking of holiday.

How is holiday pay calculated?

This is the point of most uncertainty.  Under the ERA  where pay is variable a “week’s pay” is calculated by taking the worker’s average pay over the 12 week “reference” period immediately before the leave.  The courts have so far declined to make any finding as to whether this will be the appropriate reference period for holiday pay where there are variable elements of pay.  The European Court in Lock felt it should be a “representative” period which reflects normal working.

This may differ greatly from business to business, and even employee to employee.  A longer reference period may be more appropriate where variable pay fluctuates from month to month. Tribunals may now decide this on a case by case basis.

Backdated holiday claims

The 2014 Bear Scotland decision placed a limitation on the ability to bring backdated holiday pay claims holding that any break of 3 months in a series of underpayments of holiday pay will break the chain.  Legislation introduced shortly after the decision put a cap of 2 years on retrospective unlawful deductions claims, including holiday pay.

However this two year limit may not apply in certain circumstances.

In King v The Sash Window Workshop Ltd, the Advocate-General of the European Court delivered his Opinion in a case concerning a UK worker’s holiday pay entitlement and backdated commission-based holiday pay claims going back 13 years.  The worker in this case had been incorrectly treated as self-employed.

Mr King worked for 13 years for The Sash Window Workshop Ltd (TSWW) and was paid entirely on commission.  He took varying amounts of unpaid holiday each year but kept this to a minimum given the detrimental impact on his earnings. TSWW considered him to be self-employed and not entitled to paid holiday.

Mr King’s contract was terminated upon his reaching 65 and he successfully claimed age discrimination and pay for the holiday he had taken.  He also claimed pay in lieu of holiday which he had not taken throughout his 13 years because he had been deterred from taking his full entitlement.

Carry over where the employee was prevented from taking leave

In his Opinion, the Advocate-General expressed the view that it should not be for a worker, who has been denied “paid” leave, to have to take legal action in order to receive pay for leave taken.  There should be no “pre-condition” to a worker being able to exercise their right to paid leave.

Further, a worker should be able to carry forward leave entitlement (without limitation in time) during any period when there is no “facility” provided by the employer for the worker to exercise paid leave, even where this means, as in Mr King’s case, possible carry-over of annual leave for 13 years, and that this created an entitlement to a payment in lieu upon termination.

He noted that this should not open up an opportunity for workers to “accumulate payment in lieu of leave” because once the employer provides an adequate facility for the worker to exercise their right to paid annual leave, the worker becomes responsible for taking it up in the appropriate leave period.

Relevance in the Gig Economy

The Advocate-General noted the “acute social importance” of the issues in Mr King’s case, given the prevalence in the so-called gig economy of what were once atypical working patterns.

“The problem to hand is of acute social importance, given the increasing number of people across the European Union who work on flexible, casual, and intermittent bases. These forms of employment are becoming ever more prevalent because of the provision of services via digital technologies in the age of the internet. Who should bear the risk of non-compliance with the right to paid annual leave when there is no facility in the employment relationship for its exercise, the employer or the workers concerned? Is it compatible with the EU right to paid annual leave for Member State law to first oblige a worker to take leave, before being able to ascertain if the leave will be paid?”

Although not binding, his Opinion provides guidance to the European Court.  If followed, any business operating non-traditional employment models with workers of marginal or uncertain employment status may face similar claims with profound consequences.  Workers may wait until the end of employment before claiming paid leave. Employers could face a large number of such claims, since a worker should no longer need to risk his job to bring it.

Advice for employers

I recommend employers consider the following in the light of the latest judgements:

  • Assess the employment status of the workforce.  If in doubt about self-employment try the HMRC self-employment tax tool and take advice.  You may want to engage highly skilled consultants through their personal service companies only.
  • Assess variable pay for each worker and consider the appropriate reference period for calculating holiday pay.
  • Assess the risk and potential cost of backdated holiday pay claims, seeking external legal advice if appropriate
  • Ensure that workers, as well as employees, have a “facility” to exercise their right to paid annual leave, without having to resort to costly legal action in order to enforce that right.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.