Holiday pay: give us a break

When did holidays become headline news? In times past, we took time off, came back with some chat and a tan, and that was that. We then had the line of cases on entitlements if employees fell ill while on holiday, or were absent for so long that they ran out of time to take their holidays. We may not have come to precise answers on these questions, but most employers are getting by.

Now we have a situation where it has become (for the moment) nigh on impossible for many employers to know what they should be paying, and for employees to know what they are entitled to, by way of holiday pay. Why are we here, and what is the most practical advice we can give in the meantime?

Starting with what can be stated with certainty, the Working Time Directive (2003/88/EC) entitles a worker to four weeks’ holidays in a holiday year. The directive is an EU health and safety measure introduced to ensure that workers take holidays during the year. The Working Time Regulations 1998, which are meant to implement the directive, more generously entitle a worker to 5.6 weeks per year. The regulations provide that holiday pay has to be paid at least at the rate of “a week’s pay”, calculated in accordance with the Employment Rights Act 1996. For variable pay this can mean averaging over the 12 weeks preceding the holiday. Until recently, this had not proved contentious, or particularly tricky to manage or advise on.

Normal for some

The uncertainty has arisen as judicial scrutiny has been directed to scenarios where remuneration is variable and made up of elements beyond base salary. The CJEU has determined that holiday pay should reflect “normal remuneration”, and “all elements intrinsically linked to performance should be reflected”, to avoid deterring workers from taking holidays (Williams v British Airways (C-155/10)). Shift premiums, allowances and compulsory overtime almost certainly fall within this description, but annual bonuses and sporadic, voluntary overtime might not. Commission has been found to fall within the definition (Lock v British Gas Trading Ltd (C-539/12)).

These additional elements are not necessarily required to be included in the UK for an employee with regular basic hours and a basic salary. The current 12 weeks may not be an adequate averaging period to determine “normal remuneration”, and 12 months may be required.

In cases relating to overtime (Wood v Hertel (UK) Ltd ET/2603803/12; Fulton v Bear Scotland Ltd ETS/4112472/12), the EAT has found that the regulations can be interpreted so as to comply with the directive, although at face value they do not; regular required overtime must be reflected; the first four weeks of the holiday year is “directive” leave; and any break of more than three months between “directive” leave days will break the “series of deductions”. These decisions are almost certain to be appealed. The law will probably not be clear for years. In the meantime, employees and their representatives should be mindful that claims under the regulations need to be raised within three months of the last shortfall. Claims may flood in. Contractual claims may be possible, but are likely to be limited.

Steps for employers

Private sector employers who have been complying in good faith with a potentially defective law for the last 16 years need a practical steer. Whether they decide to sit tight and wait and see, or start changing holiday pay practice now, may depend on their level of risk. As a first step, they need to check whether they have a problem. What do they not reflect in holiday pay? How many employees/workers are affected? Starting to reflect those elements which are almost certainly going to be payable, e.g. commission, shift premiums and compulsory overtime, for (at least) the first four weeks of holidays each year, mitigates risk by (probably) breaking the series of shortfalls from the next holiday taken. Some employers may consider making a one-off payment for any shortfall in any holidays taken in the last few months to try to break the series now.

Payment practice may have to be changed again once the law becomes clear, but employers facing liability may want to try to mitigate the risk of claims by taking steps now, or at least make provision. Lawyers cannot provide guarantees for clients that any particular calculation formula will be compliant, or the exact worth of any potential claim, but we should be able to help get a grip of what could well be a major challenge for many for some time to come.