Holiday pay – What your business needs to know, what it needs to do

This guide explains the implications for employers of the recent holiday pay cases (Bear Scotland Ltd v Fulton and another; Hertel (UK) Ltd v Wood and others and Amec Group Limited v Law and others) (Holiday Pay Cases) which were decided together by the Employment Appeal Tribunal (EAT) on 4th November 2014.
 
Most employers will head into Christmas feeling more cheerful as a result of the decision. Many businesses feared they might face claims for substantial back payments for holiday entitlements from their workforce, but this is unlikely to happen. However, now is the time to start paying correctly going forward and for a business to analyse its past liabilities.
 
To put it simply, the EAT had been asked to decide how holiday pay should be calculated and in particular whether certain types of payments, such as overtime and commission, should be included in that calculation in addition to a worker’s basic salary. In the event that workers may have been historically underpaid holiday pay, the EAT also needed to decide in respect of how far back a period potentially as long ago as 16 years they should be able to bring claims.
 
To see what we think you need to be doing now as a result of the EAT’s decision, skip to the NEXT STEPS section at the end of this note. If you want to understand why, keep reading.
 
But beware: this guidance sets out the holiday pay position (in England & Wales) as of now so check with Anna Moyle (a.moyle@goldenleaver.co.uk) or Caroline Leaver (c.leaver@goldenleaver.co.uk) at Golden Leaver LLP before changing your current arrangements.

Holiday pay – what is the law?

What may now be included in holiday pay?

A worker is entitled to receive ‘normal’ pay during their annual leave. What is ‘normal’?
 
According to the EAT, the payments must have been made for a sufficient period of time and be “intrinsically linked to the performance of the tasks which the worker is required to carry out under his contract of employment”.
 
This means that if your workers receive any of the types of payments set out below you will almost certainly have to take them into account when calculating holiday pay the next time your workers take annual leave:

  • Commission payments
     
  • Guaranteed overtime that is regularly worked
     
  • Non-guaranteed overtime (i.e. where the employer is not obliged to provide the overtime, but the worker is obliged to work it if requested)
     
  • Incentive bonuses
     
  • Travel time payments (not expenses, but payments for the time spent travelling)
     
  • Shift premiums
     
  • Seniority payments (payments linked to qualifications/grade/experience)
     
  • Stand-by payments
     
  • Certain other payments (such as “flying pay” and “time away pay” provided such payments are not expenses).
     

What is not included in holiday pay?

The following do not need to be included in the calculation of holiday pay:

  • Benefits in kind (e.g. company car, private health insurance)
     
  • Bonuses not linked to workers’ performance (e.g. Christmas bonus)
     
  • Expenses (including travel expenses) which reimburse workers for costs incurred
     
  • One-off bonuses and occasional payments
     

What about voluntary overtime?

This is likely to be the most common form of overtime in the majority of sectors.
 
It is where there is no obligation on an employer to offer overtime and a worker can choose whether to work it if it is offered.
 
The answer to whether this is included is that we still do not know. The EAT did not reach any definitive conclusion on this type of overtime. However, most people think that tribunals will interpret voluntary overtime as forming part of “normal” pay if a settled pattern has developed over a sufficient period of time to justify that label. It is therefore likely to be only a matter of time before employers also have to include voluntary overtime when calculating holiday pay.

Do these changes apply to a worker’s full holiday entitlement?

No, the recent decision only applies to the 20 days’ annual leave guaranteed under the Working Time Directive (EU legislation) and not the additional 8 days’ holiday which is provided for under the Working Time Regulations (UK legislation). So a different rate of holiday could be used for calculating the value of holiday for someone’s UK holiday entitlement – although that is likely to be complicated and affect staff relations.
 
The employer is also entitled to assume that a worker has taken their 20 day statutory holiday entitlement first – although it’s sensible to state this in their terms and conditions document, just to make it clear.

What is the reference period to be used for calculating the average holiday pay?

The UK’s standard 12 week reference period for calculating average pay is currently the most sensible way of dealing with this. There is discussion that it may be changed by statute or case law (to say 12 months).
 
The reason for the proposal to change the reference period is that a 12 week snapshot can be misleading, depending on the 12 weeks captured.
 
A retail worker who takes holiday in January following the Christmas rush in December when they were working far higher average hours will receive inflated holiday pay which may not be reflective of ‘normal pay’.

What if I have underpaid holiday pay in the past?

You may be exposed to claims from your workers for underpayments of holiday pay. Workers can bring an unlawful deduction from wages claim if they have been underpaid holiday pay within three months from the date the underpayment, or unlawful deduction, was made.
 
The relevant date for working out when the unlawful deduction took place is the date of the payment (or lack of it) rather than the date the holiday was taken. In most companies this is likely to be the same month in which the worker takes the holiday although there will also be some exceptions.
 
The limit on how far back a worker can claim for underpayment of holiday was the main talking point of the cases. The concern amongst businesses was that underpayments could be claimed all the way back to the introduction of the Working Time Regulations 1998 – 16 years – but that’s not what was decided.
 
If there is a gap of more than three months between the periods of holiday and payments so far received, then the worker is prevented from linking the periods. Also the judgment only applies to 20 days’ holiday out of a possible 28 and employers can consider those days as having been taken first, at the start of the holiday year, so that they are “used up” and limit any underpayment that might have happened.
 
On the basis that many business operate a January to December holiday year, workers are likely to have taken (and been paid for) the first 20 days of their holiday entitlement more than 3 months ago. If a worker who may be entitled to additional holiday pay took 20 days of holiday and received their pay for that holiday prior to 8 August 2014 then a business is more than likely to escape liability for backdated holiday pay.
 
Take a hypothetical example:

  • 3 Little Pigs Limited, an Estate Agent, has a leave year running 1 January to 31 December.
     
  • Employees are entitled to 28 days’ holiday per year, including bank holidays, when the branch is closed.
     
  • Pay day is on or around the last day of the month, when pay represents time worked that month (i.e. pay for July 2014 was paid on 31 July 2014).
     
  • Employees (who earn commission on any sales completed) are paid basic pay only for holidays.
     

Mr Wolf, the employee who typically earns the most commission a year took the twentieth day of his 2014 holiday allowance in July. He was paid for that month on 31 July 2014. This was the date of his last ‘deduction’. The holiday payment took no account of his commission payments.
 
Given that the unlawful deduction took place more than 3 months ago, Mr Wolf has no right to claim any holiday back pay. Going forward 3 Little Pigs Limited will need to consider taking into account commission earned when calculating his holiday pay.

NEXT STEPS

What should a business do going forward?

  1. Act now to make sure you pay the correct amounts for holiday taken over the Christmas period and to ensure you start 2015 with your holiday house in order.
     
  2. Establish whether the business is going to split the holiday and pay 20 days at the higher rate (inclusive of overtime, commission etc.) and eight days at the basic rate, or to pay the higher rate for the full 28 day entitlement (or more if businesses offer say 25 days’ holiday plus bank and public holidays).
     
  3. If a business decides to split the holiday, it needs to establish rules now as to how or when it will decide which period of holiday will be allocated to which method of calculating holiday pay. An obvious way of doing this would be to say all bank and public holidays will be paid at the lower rate (i.e. basic salary).
     
  4. Some businesses may want to limit liability and prevent workers from taking holiday after busy periods when large amounts of overtime have been worked. This is likely to cause morale issues and employee relations problems within a business and this should be factored into a decision. If a worker has worked additional hours they may need a break and they will be encouraged to take one if it means they will receive more holiday pay.
     
  5. Decide if the business will include voluntary overtime when calculating ‘normal pay’. It may want to take the lead and include this now in order to show staff that they have gone that extra step at a stage when there is no requirement upon it to do so. This is on the basis that most practitioners think it is only a matter of time in any event before voluntary overtime will be decided by the courts to be included in ‘normal’ remuneration if a settled pattern has developed over a sufficient period of time to justify the label of ‘normal’ pay.
     
  6. Review your staff’s holiday for the most recent holiday year to assess any possible liability your business may have for unpaid holiday pay.
     

If you would like to discuss how, as a business, you are planning to handle holiday pay in the future or you want to understand your past liabilities, please contact a member of our team.

If you would like to download this document as a PDF Click Here
 

people_wyn_large3 Wyn Lewis
020 3159 5174
w.lewis@goldenleaver.co.uk
people_anne_large3 Anna Moyle
020 3159 5173
a.moyle@goldenleaver.co.uk