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French Duncan

Holiday Pay: The great debate

23 September 2014

Holidays and holiday pay has been a regular feature of legal challenge in the employment arena for some time now.  

The question of holiday pay and sickness absence was widely contested, and has now settled with a clear understanding that employees do accrue holidays whilst they are off sick; and if sickness occurs during a period of absence, this can be recouped. 

However, the latest challenges centre around what should be included within holiday pay?  Regrettably, the answer to this is not so simple and recent case law has provided little clarity.

Recent Case Law

Without going into the detail of the judgements, the recent European Court of Justice (‘ECJ’ hereafter) cases, Williams and others v British Airways plc and Lock v British Gas Trading Ltd and Others suggest that holiday pay entitlement should not be limited to basic pay but must correspond to “normal remuneration” i.e. pay that is intrinsically linked to contractual performance.

The list below outlines the current position on various elements of pay that should / should not be included alongside basic salary: 

Pay Element

Current Position

Commission

Included

Overtime

Included, but under appeal

Allowances (e.g. travel / subsistence expenses)

Not Included

One Off Performance Bonuses

Included, but under appeal

Annual Discretionary Bonuses e.g. at Christmas

Unclear

Stand-by/Emergency Call Out Payments

Included, but under appeal

Acting Up Pay

Included, but under appeal

However, ECJ rulings are not legally binding and the UK will need to review it’s rules on the calculation of holiday pay.   If the courts do follow this decision, then a binding precedent will be set. 

Calculating Holiday Pay

Alongside this, the way in which employers calculate holidays is under debate also. 

In short, workers are entitled to a week’s pay for a week’s leave, and in the UK, they have an entitlement to 5.6 weeks worth of holiday in a year. 

In practice, this means:

  • If an employee’s pay does not fluctuate at all (i.e. they do no overtime, receive no commission or bonuses), the status quo of calculating holiday pay is just their salary divided by 52 weeks is currently correct.
  • Where an employee’s pay fluctuates, holiday pay is currently based on the previous 12 weeks worked (and as above, the ECJ suggest this should include the above elements e.g. commission, overtime etc.). 
  • Where an employee has no set working hours, holiday pay is based on an average of everything earned in the previous 12 weeks.  

The recent cases have challenged whether the 12 week reference period for calculating an average week’s pay is correct because it is argued that if pay fluctuates widely over the year and 12 weeks may not be representative of this.  Tribunals may need to decide on this on a case by case basis.  In the meantime, the 12 week reference period is likely to be the best method of calculating holiday pay.

Preventative Steps

This matter is far from settled, and recent case law has led to more questions than answers which is naturally frustrating for employers who just want to know what they need to do to protect their business.  

The most recent case, Lock, has been referred back to Leicester Employment Tribunal to consider how holiday pay should be calculated in the circumstances, and we will have to await the outcome of this. 

The goal posts are likely to be moved in due course in this widely contested subject, but what should employers do in the meantime?

  • First off, employers should avoid making any hasty decisions, and instead should take time to consider the options. 
  • Employers could decide to pay holidays as per the current European guidance of what should be included and based on the previous 12 weeks worked, on the understanding that this is a ‘moving feast’ and you may have to change what you do when UK law defines this.
  • The Working Time Regulations have been in place since 1998.  There is a chance that the outcome of further legal challenge could allow retrospective claims (i.e. all incorrect holiday pay for the last 16 years to 1998).  However, whilst this has not been tested, employees have 3 months to make a claim for alleged unlawful deductions to wages (including holiday pay).  To stop the clock / break the cycle, employers could:

-          Implement a holiday freeze for 3 months, and start paying holidays ‘correctly’ (based on the current ECJ guidance as in the above table on the understanding this could change in time)

-          Impose a compulsory ‘correctly’ paid holiday (again in recognition that what is included in holiday pay could change)

-          Take the decision to back pay commission, overtime and other payments, but depending on the size of the business and the length of service of the employee, this could be financially infeasible.

  • Finally, the outcome of further legal challenge could open the floodgates for mass litigation in this area, and so employers should not bury their heads in the sand.  This said, another perfectly legitimate approach would be to wait for further legal clarity on the matter, and in the meantime, set aside a fire fighting fund should there be claims in the future

If you have further questions in relation to the latest holiday pay legal challenge, please email l.mccosh@frenchduncan.co.uk or call 0141 221 2984.   Louise McCosh heads up French Duncan HR Services and would be happy to discuss this and our bespoke approach to HR support in further detail.