Are you calculating holiday pay correctly?February 12, 2015
Under the working time regulations, holiday pay is usually calculated in regard to an employees basic pay. Last year the Supreme Court in Williams and others v British Airways (2011) signalled the way for a significant re-think of the way statutory holiday pay should be calculated. It was established that holiday pay should include all elements of remuneration which are ‘intrinsic’ to the performance of the job.
When the issue of miscalculated holiday pay came to light in 2013, John Lewis took the pro-active approach to review their holiday pay process. On evaluation it became apparent that they had been in error and have since reportedly paid out over £40 million to their employees. This miscalculation may cost employers large sums of money as claims for underpaid holiday, in principle, can go as far back as 1998, when the Working Time Regulations came into effect.
Lock v British Gas Trading Limited (2014)
In the case of Lock the employee received commission on sales achieved in addition to his basic pay. His holiday pay was calculated by reference to basic pay only. He also received commission for sales in periods before his holiday, so that his pay during the holiday period was, in fact, fairly representative of the amounts he would usually be paid while working. However, in the months that followed his holiday, he received below average commission, reflecting the fact that he made no sales during the period when he was on leave.
Mr Lock challenged the use of basic pay only in calculating holiday pay, and claimed that this fell short of the requirements of the Directive. An employment tribunal stayed the proceedings and referred to the ECJ the question of whether the Directive required that commission be included in the calculation of the employee’s holiday pay for statutory holiday periods.
The ECJ repeated its previous statements in Williams that holiday pay should put the employee in a position during leave that, as regards salary, is comparable to periods of work. In Mr Lock’s case, because he received commission in respect of past sales during his holiday, his pay during the holiday period was comparable. However, the ECJ said that this did not satisfy the requirements of the Directive, because the fact that his overall pay would then be reduced in subsequent periods was a disincentive to take leave. Since the commission he received was intrinsically linked to the performance of tasks he was required to carry out under his contract of employment, it must be taken into account in calculating his holiday pay.
Other key decisions
Fulton and another v Bear Scotland Ltd (2013)
In Fulton, the tribunal decided that the workers should be regarded as having no normal working hours, despite the fact that their contracts guaranteed a set number of hours. This put them into section 224 rather than section 221 of the ERA 1996. Their holiday pay was therefore calculated on the basis of all their earnings within the last 12 weeks, including overtime.
This method of achieving compliance with the Working Time Directive was surprising for two reasons;
• It would apply to all of the 5.6 weeks holiday under the WTR 1998, not just the 4 weeks under regulation 13 which implements the Working Time Directive.
• By including all sums (not merely sums linked to the performance of tasks under the worker’s contract) this has the potential to go beyond what the Working Time Directive requires.
Neal v Freightliner Ltd (2013)
Shortly after Fulton in the case of Neal, the tribunal decided that words could be read into regulation 16(3)(d) of the WTR 1998. The result, therefore, was that earnings during voluntary overtime (including the overtime premium) would be taken into account in calculating the four weeks’ holiday pay under regulation 13 but not in respect of the 1.6 weeks’ under regulation 13A.
While an interesting approach from the tribunal this case was appealed to EAT but subsequently settled a week before the appeal hearing was due to take place.
Elms v Balfour Beatty Utilities Solutions Ltd (2013)
The tribunal held that if it is necessary to rectify a defect in the WTR 1998, this was “surely a matter for Parliament and not for the courts or tribunals”. Therefore the worker in that case, who had normal working hours of 40 hours a week, was not entitled to have overtime payments, standby payments and bonus payments taken into account when calculating holiday pay.
Wood and Others v Hertel (UK) Limited (2014)
An employment tribunal again held that Williams required that overtime be included in the calculation of the four weeks’ statutory holiday required by the Directive, even where overtime was not compulsory and guaranteed
Implications for Employers
It is already clear that it is only a matter of time before the principles now established at ECJ level are translated into our domestic law, either by further amendments to the Working Time Regulations or through creative judicial interpretation of the current provisions.
John Lewis hit the headlines in 2013 following a review of their payment practices. It was discovered that it had been miscalculating holiday pay for the past seven years. John Lewis had been calculating holiday payments based on contracted weekly hours of employees. It failed to take into account the higher hourly wage rate of employees working on Sundays and bank holidays, as required by the Working Time Regulations 1998. As a result, John Lewis have been reported to have paid out £40 million in compensation to underpaid employees.
For the time being the key points to note are:
• Claims for underpaid holiday can in principle for back to the earlier of the start of the employment relationship or October 1998 (the date the Working Time Regulations took effect).
• Another type of claim for the same loss is breach of contract in civil court, for which the limitation period is 6 years. A civil court can award interest on such losses but a tribunal cannot award interest in unlawful deduction of wages claims.
• Allowances which are paid to reare-you-calculating-holiday-pay-correctly-mgbmunerate employees for expenses incurred in the course of their employment need not be included.
• Voluntary overtime can be ‘intrinsic’ to job performance and therefore should be included in holiday pay.
• Following Lock, it seems clear that, where employees earn basic pay and commission in the normal course of their work, both elements must be taken into account in calculating holiday pay for the four weeks’ of holiday that are guaranteed by the Directive.
• The correct averaging period is not certain, but using the employees previous 12 weeks of employment as guidance is likely to be acceptable.