In this article, Rafia Ahmad of Backhouse Jones solicitors looks back at the cases which made the headlines and the current legal position concerning holiday pay.

The calculation of holiday pay has been a hot topic for almost two years for employers. The changes that have occurred have had a significant impact on the transport industry given that workers in the industry tend to be paid weekly pay which varies according to the amount of overtime they have carried out; however, when the employees go on holiday, they receive a basic rate of pay. The recent case law dramatically changes the way in which holiday pay is calculated.

Overtime should be taken into account when calculating holiday pay

Historically, if an employee took annual leave, an employer could pay a basic rate of pay for any holiday taken — irrespective of the amount of overtime the employee carried out.

However, employees argued that the overtime payments should be included in the calculation of holiday pay as they felt that holiday pay should be calculated to include what they would have earned had they carried out any overtime work.

Employers will no doubt have seen the news headlines back in November 2014 in respect of a decision by the Employment Appeal Tribunal (EAT) in Bear Scotland and others v Fulton and others (and conjoined cases) which dealt with the issue of overtime and holiday pay.

In this case, the EAT concluded that non-guaranteed overtime payments were intrinsically linked to the performance of the tasks required under the workers’ contracts of employment and therefore must be taken into account when calculating holiday pay.

Non-guaranteed overtime is where the employer is not obliged to offer overtime, but when it does, the employee is obliged to work it.

What does this decision mean for transport managers?

It means employees are entitled to “normal remuneration” when taking leave, so both non-guaranteed and guaranteed overtime should be taken into account in calculations of holiday pay that employees are entitled to.

The case also highlighted that any payments that are frequently made to employees such as attendance bonuses, pallet reuse bonuses, fuel economy bonuses, completing paperwork bonuses (ie anything that is intrinsically linked to the performance of the employee carrying out their work) should be included in the calculation of holiday pay.

Note:

The decision only applies to the 4 weeks (20 days) holiday entitlement and not the additional 1.6 weeks of statutory leave that employees are entitled to in the UK.

How is holiday pay calculated in light of this decision?

Use the earnings earned by an employee over the previous 12 weeks prior to the holiday being taken as the reference period to calculate the daily average and apply that rate when holiday is taken.

What about backdated payments?

This is the important part for employers. Previous concerns that claims under the Working Time Directive could be potentially backdated to 1998 when the UK adopted the directive have been dispelled.

Instead, the judgment significantly limits the scope for retrospective holiday pay claims under domestic law. The EAT has held that as the law provides for a three-month period in which to bring an unlawful deduction from wages claim, any gap in a series of deductions of longer than three-months would extinguish the claims for deductions concerning holiday pay that was paid beyond that three-month period.

Effectively, in practice this is likely to mean employees can only claim for leave during the past year in the Employment Tribunal. In any event, government legislation which came into effect in July 2015 limited backdated claims to two years maximum.

Holiday pay and commission

Bear Scotland dealt with the issues of overtime; however, another case prominent in the headlines was Lock v British Gas. This long-running case (first presented to the employment tribunal as long ago as April 2012) concerned the question of whether holiday pay should include commission.

Background

Mr Lock was employed by British Gas Trading Ltd (British Gas) as an internal energy sales consultant.

His pay consisted of two elements, basic pay and commission. Approximately half of his pay is made up by commission based on sales.

British Gas calculated Mr Lock’s annual leave at his basic rate. Mr Lock felt this was unfair given that he could not earn commission when he was on holiday and therefore his pay would be lower than what he would ordinarily receive.

Mr Lock claimed unpaid holiday pay in the employment tribunal. The tribunal referred the matter to the European Court of Justice to determine the issue.

The CJEU decided that the right to annual leave is an important principle of EU law. Employees should not be deterred from taking holiday. The facts in this case were that that Mr Lock would be put at a financial disadvantage because he was on holiday and unable to earn commission. As payment of commission was intrinsically linked to the performance of Mr Lock’s tasks under his contract of employment, it was recommended that commission should be taken into account when calculating holiday pay even if the commission had not been earned.

The Employment Tribunal

The case was then remitted back to the employment tribunal which then determined the extent to which the Working Time Regulations (WTR) 1998 could be read consistently with EU law, and if not, whether words could and should be added in, interpreting those regulations so that the calculation of a week’s pay conformed with EU law.

The employment tribunal did enter words into the WTR which meant if the pay packet that an employee receives includes any form of commission payment or variable pay based on performance which is not truly discretionary, it was now likely that these should be included in the calculation of the employee’s holiday pay.

Employment Appeal Tribunal

British Gas appealed the decision and the appeal was heard in the EAT in December 2015. However, the judgment handed down did not find in favour of British Gas’ grounds of appeal being:

  • commission and non-guaranteed overtime are dealt with under different provisions, which use different language, and the Tribunal incorrectly concluded that Bear Scotland, a case about overtime, had any bearing on the outcome of Lock

  • in any event, the EAT in Bear Scotland incorrectly concluded that UK domestic legislation could be interpreted purposively to give effect to EU law.

Perhaps unsurprisingly, the EAT found that commission should be included in the calculation of holiday pay. The EAT’s decision confirmed that the WTR 1998 can and should be interpreted to conform with the requirements of EU law to include results-based commission in the four weeks’ statutory holiday pay derived from the Working Time Directive.

British Gas has now appealed the decision to the Court of Appeal. A decision should be handed down in autumn 2017.

Current legal position

Therefore the present legal position is that employees are entitled to holiday pay which includes an element for the amount of commission they would normally receive when working.

Conclusion

In an industry where non-guaranteed overtime is prevalent and where many small payments are made, such as attendance and fuel economy bonuses, which are intrinsic to the worker performing their contractual duties, transport companies — if they have not already done so — should be looking to review the way in which to calculate holiday pay in order to be comply with their legal obligations.

Last reviewed 15 June 2016