The EAT has recently confirmed, in the case of British Gas v Lock, that commission does need to be included in the calculation of holiday pay – confirming and applying the earlier decision of the EAT in the Bear Scotland case (which related to non-guaranteed overtime). Subject to any appeals, the position therefore remains as set out in our previous update on calculating holiday pay – do let us know if you have any particular queries…

Following the Employment Appeal Tribunal’s decision in the long awaited and much debated cases of Bear Scotland Ltd v Fulton and another, Hertel (UK) Ltd v Wood and others and Amec Group Ltd v Law and others, there has been much debate and confusion as to what should and should not be included in the calculation of holiday pay. However, there have since been a number of follow on cases and the following principles are emerging as the legal position on holiday pay:

WHAT SHOULD BE INCLUDED BY EMPLOYERS WHEN CALCULATING HOLIDAY PAY:

The general principle behind the recent case law is that an individual should not be disincentivised from taking their annual leave and, as a result, their holiday pay should reflect their ‘normal remuneration’.  Normal remuneration has been held to include:

  • Guaranteed overtime – that is where the employer is obliged to offer overtime and the employee is obliged to perform it;
  • Non-guaranteed overtime – where the employer is not obliged to provide overtime, however the employee is required to perform any overtime when requested;
  • Commission;
  • Stand-by and call out payments;
  • Acting up allowances – i.e. whereby the employee is temporarily covering a more senior role and is being paid increased remuneration to reflect the additional responsibilities;
  • Shift allowances and premiums;
  • Payments that relate to the ‘personal and professional status’ of workers, such as those based on seniority, length of service or professional qualifications;
  • Travelling time payments – but only where such payments are in excess of actual expenses incurred (and thereby constitute additional taxable remuneration). This is on the basis that such payments do not represent a genuine reimbursement of expenses but are directly linked to the work performed;
  • Incentive bonus arrangements; and
  • Performance/productivity linked bonuses.

Bonuses are something of a grey area (see further below), however it is now clear that both performance and incentive bonus schemes should be included in the calculation of holiday pay on the basis that such payments are ‘intrinsically linked’ to the performance of tasks under the employee’s contract.

 

WHAT NEED NOT BE INCLUDED BY EMPLOYERS WHEN CALCULATING HOLIDAY PAY:

Whilst not all of the elements below have been subject to express decisions regarding their exclusion from holiday pay calculations, given their nature we consider it is unlikely that these will need to be included in the calculation:

  • Purely occasional or ancillary costs – i.e. where a worker is reimbursed for costs actually incurred such as genuine travel or subsistence expenses. However, as per the above, where an allowance is more in the nature of a bonus for performing certain tasks or performing them under certain conditions or at certain times, it should be included;
  • Time off in lieu; and
  • Purely discretionary bonuses not linked to performance – e.g. a Christmas bonus paid equally to all staff.

WHAT ELEMENTS CURRENTLY REMAIN UNCERTAIN:

There are certain elements of variable pay which have yet to be the subject of case law and as a result it is not yet entirely clear whether they should be included.  We have listed these payments below, together with an indication as to whether we think such payments are likely to be payable in the future. Depending on your attitude to risk, the more cautious employers may choose to begin including such payments now to avoid or mitigate any future liability or possible back pay claims. However, in advance of making a formal decision, we recommend having a discussion with us beforehand in relation to the specific circumstances of the payments.

  • Voluntary overtime – that is where there is no obligation on the employer to offer overtime and no obligation on the employee to perform such overtime when offered. Whilst voluntary overtime is yet to be the subject of any English case law, a recent Northern Ireland decision has confirmed that such overtime should be included in the holiday pay calculation. Looking at the direction of travel, it is therefore likely to be the case that the same decision is made by the Courts in England and Wales.
  • Bonuses where the taking of holidays has already been factored in to the performance assessment – i.e. where the terms of the bonus scheme state that the target is calculated on the basis of 232 days (i.e. the 260 working days in each year minus 28 days holiday). It is arguable in these circumstances that as bonuses have been included when setting the bonus target, there is no need to include such bonuses in the calculation of holiday pay.  However, the converse argument is that a worker could still increase his chance of achieving the bonus if he/she does not take annual leave and works the extra days – thereby the bonus scheme could effectively disincentivise the worker from taking annual leave. Such bonuses therefore remain a particularly grey area and specialist advice should be sought.
  • Team bonuses: where bonuses are not dependent on individual targets but rather the performance of the team, it is arguable that there is no disincentive to any one individual taking a period of annual leave. However, whether such bonuses should be included will likely depend on the particular conditions of the relevant scheme and the number of workers in the team in question. Accordingly, further specialist advice should be sought on this point.

HOW SHOULD HOLIDAY PAY BE CALCULATED?

The first stage in the calculation will be assessing each worker’s normal remuneration. This is straightforward where an employee has a settled pattern of work without any variable elements. However, where there is no settled pattern of work and/or the worker receives certain variable elements of pay it will be necessary to use a ‘reference period’.   It has been suggested that the method for calculating a week’s pay set out in the Employment Rights Act 1996 should also be utilised for these purposes – that is, taking the average pay from the 12 weeks prior to any period of annual leave taken.  For the risk averse, this would be the safest option, but it does carry a financial consequence.  In particular, using this methodology leaveS open the possibility of some employees ‘tactically’ taking annual leave after a particularly busy 12-week period and effectively skewing their holiday pay entitlement significantly to their benefit.

On this basis, another option (albeit one which may be challenged by the Courts in due course) is to use a ‘12-month reference period’ which, from a common sense perspective, seems more equitable – i.e. take the employee’s average weekly remuneration from the previous 12 months and pay any holiday entitlement for the following year on this basis. In either case, it would be prudent to document your business rationale evidencing the thought process applied.

It should also be borne in mind that the current requirements only apply to the first 4 weeks of annual leave entitlement in each year (that is 20 days). Therefore, any additional entitlement over and above the first 20 days of annual leave taken, can be paid at basic salary only and need not be based on the calculated average.

There has been suggestion that a worker’s average remuneration could be multiplied by 8.33% (representing 4 weeks (the statutory minimum 20 days’ holiday) divided by 48 weeks (the number of working weeks in a year)) as a more simple method of calculating any additional holiday pay due. However, such a calculation is not technically in line with the legislation and may face challenge.

Sarah Luxmoore