Insights 14.8.18

The price of holiday pay

Insights 14.08.2018

This Insight reviews the legal position and implications for employers with regards to holiday pay and employee overtime.

Employers, of course are fully aware of their obligation to provide a statutory minimum of paid holiday to employees (28 days including bank holidays) – many businesses offer enhanced holiday entitlement over and above the statutory requirements. A common misconception (albeit in some cases entirely appropriate) is to pay holiday period at a rate in line with the employees’ basic earnings. What is the position where employees are working overtime or receiving other cash benefit allowances? Does the same calculation principle apply in all cases? Here, we review the legal position and implications for employers.

Legal Background

In the cases of Bear and Scotland Ltd (et al) v Fulton, Hertel (UK) Ltd v Woods and Amec Group Ltd v Law), the Employment Appeal Tribunal’s (EAT) combined cases decision was that regular overtime that is not guaranteed, but that employees are obliged to work when it is offered, must be included in holiday pay calculations.

However, the EAT’s decision that employees can only bring claims for underpayments where the gap between holiday periods under question is a maximum of three months, along with the government’s changes to the regulations under the employment Rights Act 1996 that claims cannot go back further than two years (effective from 1st July 2015), does appear to potentially alleviate fears of claims going back years for historical holiday pay issues.

The position does remain complex as shown in the case of The Sash Window Workshop and another v King. The case drew an unexpected outcome and concerned a self-employed salesman who was determined to have worker status, the employer having previously believed Mr King to be self- employed. The European Court of Justice ordered Sash Window Workshop Ltd to pay back Mr King 13 years of unpaid holiday pay (the whole period he worked for the company). This case may be more applicable to issues around the gig economy where the worker/employee has been deferred from accruing and taking holiday, rather than a ruling for holiday pay cases per se.

Similarly, in the case of Dudley Metropolitan Borough Council v Willets, in addition to the requirement to include compulsory overtime in a holiday pay calculation, the EAT ruled that ‘regular and settled’ voluntary overtime should have been included in the holiday pay. Other elements to consider here are out of hours payments, standby payments and call out allowances.

What constitutes ‘regular and settled’?

It may not be surprising to know there is no definitive answer here. The EAT held that this should be determined on a case by case basis to determine whether or not overtime payments are sufficiently ‘regular and settled’ to be accounted for in holiday pay calculations.

In order to manage the potential ambiguity ahead, employers may wish to take an average pay calculation approach over a defined period for holiday pay calculations. There is no legal precedence addressing the defined period, however in some cases a pragmatic solution would be to reference the previous 12-week period for establishing normal pay for such calculations.

The Advisory, Conciliation, and Arbitration Service (ACAS) advices that workers should receive the same pay during a period of annual leave as they would if they were at work – this goes outside the scope of just overtime, for example car allowance received monthly in addition to basic pay. Of course, where there are continuously set additional payments over and above the basic pay in place (whether contractual or otherwise), the calculation will be straightforward to include as part of normal pay for holiday pay purposes.

Does this currently affect all employers?

Ultimately the implications of the rulings apply to all organisations and businesses, although the current impact will depend on working arrangements and remuneration strategies in place. Industry sectors with overtime or commission-based remuneration are at greater risk and should urgently review payroll practices.

What next?

For further questions about this article or any other HR matters, CBW’s HR Consultants can provide bespoke and comprehensive advice across the full scope of people management responsibilities and the employee life cycle. Please get in touch.