July 20, 2016

Holiday pay – how do you calculate your staff allowances?

While employees count down the days to their time in the sun, concerned only by the price of the pound and which socks and sandals to pack, the summer season is an altogether more difficult time for employers.

As well as the obvious complications caused by half the workforce heading to the Costa Del Somewhere, there’s the massive headache of holiday pay calculations to contend with.

The confusing situation hasn’t been helped by the plethora of cases in the appeal courts over the years.

What should be included? What should be left out?

And what’s the score with commission, guaranteed overtime, compulsory overtime and voluntary overtime?

Read on for a run-through of the current law, and cases that could affect your employees’ holiday pay this summer.

Guaranteed overtime

Guaranteed overtime – where an employer specifies a fixed number of overtime hours in the contract of employment – has always been required to be included in holiday pay calculations. This is settled law and not the subject of any legal challenge.

So, if your employee is contracted to work fixed overtime, it MUST be included in their holiday pay.

Compulsory but non-guaranteed overtime

Compulsory overtime refers to a contractual requirement for the employee to work any overtime offered. This is usually expressed clearly in the contract of employment.

The issue is now settled law (see Fulton v Bear Scotland). The Employment Appeal Tribunal (EAT) concluded that such overtime must be included in holiday pay calculations, but only in respect of the minimum four weeks employees are entitled to under the EU Working Time Directive.

The UK has a more generous entitlement of 5.6 weeks’ holiday per year, but there is no obligation for an employer to include the extra 1.6 weeks when calculating holiday pay.

That said, many do purely for the sake of simplicity.

Voluntary overtime

Two important cases have a bearing on voluntary overtime and holiday pay. These could be an indication of the way courts and tribunals are interpreting European Court of Justice (ECJ) rulings on holiday pay and may reflect a move towards holiday pay truly reflecting actual earnings.

Patterson v Castlereagh Borough Council

This was a decision of the Northern Ireland Court of Appeal (NICA) which suggested that even voluntary overtime could be included in holiday pay if sufficiently regular. NICA decisions aren’t legally binding in the UK, but can be persuasive in similar cases.

The NICA judgment was, however, a cautious one: it stated voluntary overtime is merely ‘capable’ of being included in calculations, rather than insisting it must be. Each individual decision will rest on the individual facts of the case.

In this case, the NICA referred the matter back to the industrial tribunal to hear evidence of the overtime actually worked, what would be a suitable reference period to calculate entitlement, and whether purely voluntary overtime should be included in holiday pay in accordance with the principles set out in earlier case law.

As such, it’s neither a binding decision nor a definite answer, but… it does suggest courts are indicating they are open to the idea.

White & Others v Dudley Metropolitan Borough Council

In this case, the employment judge considered voluntary overtime, voluntary standby and voluntary call-out payment should be considered normal pay if they are undertaken with ‘sufficient regularity’.

It is not yet clear how ‘sufficient regularity’ is to be defined, and neither is it clear what the specific facts of this case are. As soon as the written judgement has been released, we’ll be reviewing it carefully to see how it affects holiday pay rulings and reporting back.

As cases of this nature can turn on their own facts, it’s important employers review the decision and take advice before considering altering policy.

So where do we stand on voluntary overtime?

Although the issue is not yet settled law, these two cases indicate courts and tribunals are moving towards the ECJ principle that holiday pay should reflect ‘normal’ remuneration as far as possible.

The uncertainty in the law in this area clearly causes difficulty for employers, but it might be unwise to act on the case law as it currently stands until the principle becomes much clearer.

Don’t rush to update your policies and, if you’re unsure whether your current practice is within the letter of the law, take advice from an expert in employment law.

Commission payments

The long running issue about whether commission payments should be included in holiday pay has not yet reached a final conclusion.

In Lock v British Gas, the question of including commission in holiday pay was referred to the ECJ for a ruling. The ECJ held that employee Mr Lock’s commission was so directly linked to the work that he carried out it should be included in his holiday pay (note that in his case it amounted to around 60% of his earnings.)

The UK Tribunal dealing with the case added words to the Working Time Regulations to make them comply with the ECJ ruling. The appeal against that decision by British Gas was refused by the EAT.

British Gas escalated the case to the Court of Appeal where it was heard on 11 July.

We won’t know the outcome until some time in the autumn but in the meantime, as with all case law in a state of flux, employers still need to decide what they should do.

One option is to change policy to comply with the ECJ ruling, but that runs the risk of the decision being overturned by the Court of Appeal.

Another option is to do nothing, and if the British Gas appeal succeeds then that will have proved a wise decision. However, if the appeal fails, then doing nothing could build up liability for potentially substantial back pay claims (but do note the two-year limit on backdated wage claims introduced by the Government in 2015).

A more sensible solution might be to refrain from changing policy but setting aside some financial contingency in case the Court of Appeal decision goes against British Gas.

In summary

Whilst the issue of compulsory overtime and holiday pay (Fulton v Bear Scotland) appears to be settled law, there remains uncertainty about commission and purely voluntary overtime.

The Lock v British Gas case involved sales executives with 60% of their earnings made up of commission – one wonders whether the decision would have been the same had the employee earned only a marginal amount in commission?

Would it have represented a true deterrent to them taking their statutory leave if, say, only 5% of their earnings were made up in this way? And, of course, how does an employer determine whether purely voluntary overtime is carried out with ‘sufficient regularity’?

These are questions which no doubt will be assessed by the courts in due course and, hopefully, result in a clearer statement of the law in this area. In the meantime, employers will need to make a commercial decision on what approach to take to limit exposure to costly litigation.

Employers affected by any of these issues should seek professional advice on how to deal with any claims, and what steps they can take to amend their policies.

Contact the team for further guidance or call 0845 184 4615.

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About the author

Tom Muirhead

Tom has represented clients across the UK, both at Employment Tribunal and in the Employment Appeal Tribunal. With a strong background in HR at senior level, Tom is adept at explaining the legal framework to clients in a practical way.