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In addition to current legislation, a number of recent court judgments should be considered when calculating holiday pay.
The Government has also introduced regulations to take effect from 1 July 2015 to limit and clarify the maximum amount of back-dated holiday pay that can be claimed.
This means that the rules employers and workers follow to calculate holiday pay may need to be updated.
1) Guaranteed and normal non-guaranteed overtime should be considered when calculating a worker's statutory holiday pay entitlement but there is currently no definitive case law that suggests voluntary overtime needs to be taken into account.
2) Commission should be factored into statutory holiday pay calculations.
3) Work-related travel may need to be factored into statutory holiday pay calculations.
4) A worker's entitlement to holiday pay will continue to accrue during sick leave.
5) Workers must take their statutory paid annual leave allowance and can only be paid in lieu for this when their employment ends.
Guaranteed overtime is where the employer is obliged by the contract to offer and pay for agreed overtime. Following a judgment in 2004, guaranteed overtime must be included within the calculation of holiday pay.
Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but if they do then the worker is obliged by the contract to work overtime. On 4 November 2014 the Employment Appeal Tribunal made a ruling in the case of Bear Scotland v Fulton which covers how holiday pay should be calculated when non-guaranteed overtime is worked. This case is really the point of this Critical Update.
The judgment clarified that:
This judgment may have an impact in situations where non-guaranteed overtime is carried out by workers on a regular or consistent basis.
It is unlikely to have an impact in situations where non-guaranteed overtime is either already factored into holiday pay, or possibly where this overtime is only used on genuinely one-off occasions.
Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request as there is no contractual obligation on either side to offer or refuse overtime. The question of voluntary overtime has not been directly considered by any recent judgments, so there is currently no definitive case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay.
Commission is usually an amount of money a worker receives as a result of making sales and can make up some or all of their earnings. On 22 May 2014, the European Court of Justice heard the case of Lock v British Gas Trading Ltd and ruled that commission which a worker would normally earn should be factored into holiday pay calculations. This ruling has been referred back to the UK to specify how holiday pay including commission should be calculated. Until this has taken place, there will be no definitive legal answer about how the calculations should be made, or how/if claims can be backdated.
Work-related travel can have a number of different meanings but for most employment matters, this will usually mean any travel that is made for work purposes that is not a part of a worker's commute to their usual place of work. On 4 November 2014 the Employment Appeal Tribunal issued a judgment in a case joined to Bear Scotland v Fulton which covers how holiday pay should be calculated in relation to work-related travel. Where payments are made for time spent travelling to and from work as part of a worker's normal pay, these may need to be considered when calculating holiday pay.
Holiday pay and sickness
When a worker takes paid or unpaid sick leave, their annual leave will continue to accrue. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they may choose to specify a period where they are sick but still wish to be paid annual leave at their usual annual leave rate.
Calculating holiday pay for different working patterns
No matter the working pattern, a worker should still receive holiday pay based on a 'week's normal remuneration'. This usually means their weekly wage but may include allowances or similar payments. Some of these payments might include the situations described earlier on this page, such as commission.
For workers with fixed working hours - if a worker's working hours do not vary, holiday pay would be a week's normal remuneration.
For workers with no normal working hours - if a worker has no normal working hours then their holiday pay would still be a week's normal remuneration but the week's pay is usually calculated by working out the average pay received over the previous 12 weeks in which they were paid.
For shift workers - if a worker works shifts then a week's holiday pay is usually calculated by working out the average number of hours worked in the previous 12 weeks at their average hourly rate.
Payment in lieu of holidays
While workers are in employment, 5.6 weeks of their annual leave (this is the amount all UK workers are statutorily entitled to) must be taken and cannot be 'paid off'. Anything above the statutory allowance may be paid in lieu but this would depend on the terms of the contract. When a worker's employment is terminated, all outstanding holiday pay that has been accrued but not taken (including the statutory allowance) must be paid.
Employers need to decide how they will apply the Bear v Fulton judgment
As the dust begins to settle following the judgment of the Employment Appeal Tribunal in the case Bear Scotland v Fulton, one key question for employers is how to determine what a reasonable reference period will be for calculating a week's holiday pay.
It seems clear that at least some types of overtime pay and some forms of commission payment, as well as payments for aspects of a job which are inconvenient, must be included in the calculation of holiday pay. The courts have pointed out these types of payment must be included in the calculation if the payments are:
The courts also noted that both the work and the payment for it may fluctuate: there will be busy times with significant overtime, and quieter times with little or none. Such fluctuations will be common in some industries, so selecting a period of time for the calculation of average pay will be crucial.
When determining what a reasonable reference period will be in these cases, employers will have to make decisions about which weeks of work are used to calculate average or usual pay. While the courts agree the reference period for calculating pay will be a matter for national courts and EU member states to decide, the judge in the Bear Scotland case suggested that employers may have some discretion on the matter, but any period they select must be reasonable.
The present mechanism for calculating a week's pay where there are no normal working hours is set out in the Employment Rights Act 1996 (Section 124). It uses a fairly rigid formula based on the average wage of the 12 weeks immediately preceding the calculation date. Will this be appropriate for calculating pay for working time directive holiday (four weeks out of 5.6 weeks due under the UK's working time regulations)? The answer to this will probably depend on work patterns in that particular industry, and may be a good starting point.
However, there are obvious problems with this approach. To begin with, any reference period must be fair to the worker so it does not act as a disincentive to taking holiday, and it shouldn't lead to workers being treated differently depending on when their holiday is taken. Employers (and employees) will not want a situation where leave taken at some points is always paid more than leave taken at other times.
In some cases, an annual or six-month reference period may be more appropriate.
Organisations will need to be careful to avoid discrimination. Employers should consider issues such as fixed religious holidays, and the need to take annual leave to fit around childcare commitments, as well as the key question of whether or not all employees will be able to take holidays at a time that suits them.
Until further guidance is forthcoming, either from the courts or as a result of a government review, the practical advice must be for employers to do two things at least:
A one-size-fits-all formula would not seem appropriate, given the nature of industry-specific work patterns. A well-reasoned and fair policy will be welcomed by a workforce as providing certainty, and may form a useful basis for negotiation and the avoidance of claims.
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