Calculating Holiday Pay
It is likely you will have seen the saga in the national press on how employers need to calculate a worker’s holiday pay. Over the last year there have been a number of cases in the UK tribunals and the European Court of Justice (ECJ) regarding how much a worker should be paid whilst they are on holiday. The outcome of the cases is that workers should be paid their ‘pay that is normally received.’ The aim of the legislation is to ensure that there is no financial disincentive to a worker taking holiday.
The courts have distinguished between three different types of overtime.
- Guaranteed overtime is where the employer is required to pay the worker even if there is no work for them to do. This type of overtime should be included in the holiday pay calculation.
- Non-guaranteed overtime is where the worker is obliged to work overtime if required, but the employer is not obliged to provide overtime or pay in lieu. For example, where drivers are employed on a basic eight hour day, but are required to work longer hours if they get stuck in traffic or don’t finish their deliveries. Following the recent decisions, these overtime payments should also be included in the holiday pay calculation.
- Voluntary overtime is where an employer does not have to provide overtime and the worker is not required to work if asked. For example, if a secretary’s contract states her core hours and then says she may be asked to work overtime from time to time, but is not required to do so. The position regarding voluntary overtime remains uncertain as we do not yet have a formal decision. If however, the cases are analysed, it would seem that where there is a settled pattern of overtime for a significant period, this should be included in the holiday pay calculation. The position regarding one-off or ad hoc periods of voluntary overtime is less clear.
Commission payments should be taken into account when calculating a worker’s four weeks’ leave which is provided for in the Working Time Regulations 1998 (WTR). The ECJ has explained that if commission payments are not taken into account when calculating holiday pay, the worker will be placed at a financial disadvantage when taking their holiday under the WTR. In such circumstances the worker may be deterred from taking their holiday, contrary to the purpose of the WTR. It is important to remember that the WTR are a health and safety measure to ensure workers have sufficient time away from the workplace to enable them to carry out their duties safely.
If a worker is entitled to have their overtime pay included in their holiday pay calculation, the next obstacle to overcome is determining how to calculate the correct reference period. If the overtime is regular and consistent, the simplest option is to treat it in the same way as salary.
Where however the overtime is irregular, employers will need to consider what the appropriate reference period is. The ECJ has ruled that this is a matter for national courts to decide but employers need to use an appropriate reference period to achieve a representative average.
Unfortunately, the WTR do not include a reference period for this calculation so the correct reference period remains uncertain. There is disparity between UK law and the European case law. Under the WTR a 12 week reference period is used for calculating holiday pay for workers who do not have normal working hours and some commentators have suggested that this should be used for calculating overtime pay too. However, the Advocate General has suggested a 12 month reference period would be appropriate, particularly where overtime payments fluctuate throughout the year. There is therefore no firm answer to this question at the moment. What employers should do is to ensure that the period chosen provides a representative average of overtime earned by the worker.
How far back can claims go?
Employers have been concerned at the potential for liability for holiday pay claims to go back to 1998, when the WTR were introduced however The Deductions from Wages (Limitation) Regulations 2014 now imposes a cap of two years on retrospective unlawful deductions claims presented on or after 1 July this year.
What should employees do now?
The inclusion of overtime and commission payments in the holiday pay calculation is not going to go away. Employers should audit the risk to their business now. This will involve looking at the overtime arrangements in place and assessing whether they are guaranteed, non-guaranteed or voluntary. Employers will then need to consider what the appropriate reference period is for their business. In doing so, it is important to eradicate irregularities in overtime payments. Having done an audit, employers will need to decide whether they need to include overtime payments in the holiday pay calculation.