There have been a number of recent cases culminating in the joined cases of Bear Scotland Ltd v Fulton and others; Hertel (UK) Ltd v Woods and others; and AMEC Group Ltd v Law and others (judgment given on 4 November 2014) which have substantially changed the way that holiday pay should be calculated.
Historically, the understanding of the calculation of holiday pay has been as follows:
1. A worker has 2 types of annual holiday. He has a minimum entitlement of 4 working weeks bestowed by the Working Time Directive (“the 4 Week Entitlement”) and incorporated into the Working Time Regulations 1998 (“the WTRs”). He also has a further 1.6 working weeks of annual holiday under the WTRs, (“the Additional Entitlement”) (not required by the Directive) making a total entitlement of 5.6 working weeks.
2. A worker is entitled to be paid for holiday at the rate of “a week’s pay” for each week of holiday. There is specific legislation governing how a week’s pay for these purposes is calculated but broadly speaking:
- For workers with normal working hours whose pay does not vary either according to the actual hours worked or the amount of work done, a week’s pay is what they get paid for working those hours in a week under their contract of employment, i.e. basic salary only.
- For workers with normal working hours whose pay varies according to the hours worked or the amount of work done, a week’s pay is their average weekly remuneration over a period of 12 weeks before the calculation date.
- A week’s pay for workers with no normal working hours is their average weekly remuneration over a period of 12 weeks before the calculation date.
3. Historically, it was understood that in respect of category 2(ii) above, in respect of workers with normal working hours whose pay varied according to the hours worked or amount of work done:
- Guaranteed and compulsory overtime formed part of “a week’s pay”.
- Voluntary or non-guaranteed overtime, even if regularly worked did not form part of a week’s pay.
- Where pay varied but not as a result of the amount of work done or hours worked, the pay variation was not taken into account as part of a week’s pay. So for example, sales commission whilst a pay variation, was not a variation caused by the amount of work done or the hours worked, it was based on income generated during normal hours of work. Equally, bonuses did not form part of the calculation of a weeks’ pay.
Whilst the Bear Scotland cases related to the issue of overtime, from the judgment, the following principles relating to holiday pay in general can be extracted. In respect of the 4 Week Entitlement period only:
1. “Normal remuneration” is to be paid during holidays.
2. An element of remuneration is normal if there is an intrinsic or direct link between the payment and the work a worker is required to carry out.
3. Where overtime is required to be carried out it is intrinsically and directly linked with the work whether guaranteed or not. Voluntary overtime could form part of normal remuneration if a settled pattern has developed to justify it being called “normal”.
4. If the following are intrinsically linked to the performance of the worker’s contractual duties they should be included in the calculation of holiday pay:
- Commission payments;
- Incentive bonuses;
- Payments that relate to the “personal and professional status” of workers such as those based on seniority, length of service or professional qualifications
- Bonuses based on productivity or performance;
- Shift allowances and premiums;
- Standby payments and payment for on-call duties;
- Travel or other allowances that are treated as taxable remuneration.
5. The following would not be included in the calculation of holiday pay:
- Benefits in kind;
- Bonuses not linked to performance or that are ad hoc or occasional (and therefore not “normal” or intrinsically linked to the work);
- Reimbursement of expenses.
6. The period over which “normal remuneration” should be assessed is not clear. It must be a representative period but that could be anything from one month to one year. This is a matter which is likely to be the subject of future litigation.
In respect of the Additional Entitlement, it appears the historical position remains effective and in respect of that period, the calculation of holiday is substantially more restricted.
Clearly the effect of the Bear Scotland cases is substantial and will create significantly larger holiday payments for some workers who receive more than just a basic salary. So much so that the government has announced it has set up a task force to consider the impact it will have on businesses.
There was also concern that the judgment would create liability for employers who had been making payments that were less than they should have been, which stretched back to 1998 when the WTRs came into force. Under the unlawful deduction provisions of Employment Rights Act 1996, claims based on a "series of deductions" can generally be brought in a tribunal within three months of the last in the series.
There is some relief within the judgment in that it was held that a “series of deductions” is broken by gap between deductions of more than 3 months, thereby reducing the extent to which retrospective claims can be made.
Going forward, employers who provide more than basic salary and benefits in kind to employees or other workers will now have to reassess the methods by which they calculate holiday pay for the 4 Week Entitlement to ensure that individuals are not underpaid, and to avoid potential claims.
Note that in respect of payments in lieu of accrued but untaken holiday on termination of employment, the method of calculation of such payments can be determined by a “relevant agreement” e.g. the contract of employment. However, this does not mean that the employer can contractually require the employee to take a nominal sum in lieu of accrued holiday on termination of employment. Existing case law indicates the payment in lieu must reflect what the worker would have received had he exercised his right to holiday during the employment relationship. Does this mean it also has to be based on “normal remuneration”? The Bear Scotland cases did not address this point so further litigation may be expected in this regard also. For the time being however, there seems to be little point in changing a contractual termination calculation based on salary only.
For further information on the issues raised in this article, please contact a member of the Spencer Wyatt team on 020 7925 8080 or by email at firstname.lastname@example.org