Holiday Heaven or Holiday Hell? The current position on holiday pay explained

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Posted in:HR and Employment|July 28, 2015 | Join the mailing list

The holiday season is upon us and employers everywhere will need to grapple with the thorny issue of calculating holiday pay entitlements. 

There have been a number of important Employment Tribunal and Employment Appeal Tribunal decisions in recent years concerning the calculation of holiday pay entitlements under the EU Working Time Directive and in particular whether commission and overtime
payments should be included.

These landmark cases, dealing with
the interpretation of the EU Working Time Directive and the UK’s Working Time Regulations, (Lock v British Gas Trading Limited; Bear Scotland Ltd v Fulton; and Patterson v Castlereagh Borough Council) have changed our understanding of how holiday pay should
be calculated by employers.

EU law states that employees have the right to at least four weeks’ paid annual leave, but does not say how holiday pay should be assessed.  In the UK, under the Working Time Regulations 1998, employees are entitled to the minimum four weeks’ annual leave
plus an additional 1.6 weeks. It was always understood that pay during this leave could be based on a worker’s basic salary only, excluding payments such as overtime and commission.

However, it is clear that, as the law currently stands, that practice must change if businesses are going to comply with the law on holiday pay. 

Bear Scotland Ltd v Fulton

In Bear Scotland v Fulton, the Employment Appeals Tribunal (“EAT”) held that, under Article 7 of the EU Working Time Directive, regular non-guaranteed mandatory overtime, which the worker was required to undertake as part of their work, had to be paid as
part of the worker’s holiday pay and that the Working Time Regulations 1998 should be interpreted accordingly.

Lock v British Gas Trading Limited

In Lock v British Gas, a claim was made over whether or not commission should be included in holiday pay. The claimant received a basic salary and commission on a monthly basis, with the commission accounting for roughly 60% of his pay. The claimant went
on holiday, and was paid basic salary and commission from sales from previous weeks. After the holiday, the claimant’s pay was lower because his holiday had meant no sales and no commission, meaning therefore he had effectively lost income by going on holiday.
His claim was referred to the Court of Justice of the European Union, which stated that the rationale for the holiday pay provided for in the Working Time Directive is to enable workers to actually take the leave to which they are entitled and that workers
should not be worse off because they have taken holiday.  Therefore, it concluded that commission should be included in the calculation of a worker’s holiday pay entitlement.

On applying this ruling, the UK Employment Tribunal found no difference between commission and pay for non-guaranteed overtime, which Bear Scotland v Fulton had already decided must be reflected in holiday pay, and held that commission too should be included
when calculating holiday pay.

British Gas has appealed this decision, so there remain question marks over whether that will ultimately be the case.

Patterson v Castlereagh Borough Council (Northern Ireland Case)

More recently, Patterson focused on the issue of whether voluntary overtime  should count towards an employee’s holiday pay entitlement, which would be an extension to the ruling in Bear Scotland.  Decisions of the tribunals and courts of Northern Ireland
do not bind tribunals and courts in England and Wales, but they are advisory, and indicative generally of the approach the courts are taking towards interpretation of the Working Time Directive.

In the first instance a Northern Ireland tribunal rejected the employee’s claim of unlawful deduction from wages, and distinguished the case facts from those in Bear Scotland Ltd, as the overtime was purely voluntary. However, on appeal, the Northern Ireland
Court of Appeal overturned the tribunal’s decision. It stated that there was nothing in principle to prevent purely voluntary overtime from counting towards holiday pay.

The Court said that it would be a question of fact in each case as to whether the voluntary overtime should be included as part of a worker’s holiday pay. It would be dependent upon a number of factors, such as whether the overtime is so regular as to become
part of the employee’s normal remuneration. However, the court did not make a ruling on what level of regularity would need to be present for overtime to form part of holiday pay entitlement, so that questions remains unclear for individual cases.

What impact will these cases have?

It is clear from the above cases that this area of law is in flux, which has the potential to cause confusion for employers and workers alike.  The current position is that commission payments, mandatory overtime and probably voluntary overtime (in some
but not all cases) must be included when calculating a worker’s holiday pay. 

Whilst the practicalities of determining the calculations have yet to be clearly addressed, guidance on the calculation has been given in the case of Lock v British Gas Trading Limited, in which the Employment Tribunal proposed an averaging calculation over
the 12-week period prior to the day of leave. 

Employers need to be aware of these cases and consider what changes they will need to make when calculating their workers’ holiday pay going forward, and should take legal advice on their potential exposure to back pay claims on the basis that workers may
have been underpaid in the past.

For more information about any of the above or for practical commercial advice on this or any other aspect of employment law, please contact
Kim Freeman-Smith of the berg Employment team on 0161 829 2599
or email her at kimf@berg.co.uk.

Follow us on Twitter: @Berg_HR

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by berg or any of its partners or employees. Professional legal
advice should be obtained before taking, or refraining from taking, any action as a result of this article.)

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