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How to Calculate Holiday Pay – Further Developments

In November last year, the Employment Appeal Tribunal (EAT) ruled in the joined cases of Bear Scotland Ltd v Fulton, Hertel (UK) Ltd v Woods and Amec Group Ltd v Law that all elements of a worker’s normal remuneration must be taken into account when calculating holiday pay.

The question of whether commission and voluntary overtime should also be included in calculating holiday pay has now been looked at in more recent cases and we set out the details below.

The obligation to give workers paid holiday derives from the European Working Time Directive and the UK Working Time Regulations. Previously, these rules had been interpreted as saying that it is lawful for employers to calculate holiday pay by reference to basic pay only.
However, in the Bear Scotland case, it was held that withholding pay should include payments in respect of non-guaranteed overtime (i.e. overtime that the employer is not obliged to provide but which, if the employer offers it, the worker is contractually obliged to perform). Therefore, the EAT’s decision represented a significant change of approach.

Since November, employers have been grappling with how to respond to the Bear Scotland case. Some have changed their approach to include overtime payments in holiday pay calculations whereas others have been taking a ‘wait and see’ approach. For those who have yet to make changes, there have been some interesting developments, as detailed below.

Should commission be included in holiday pay calculations?

The Employment Tribunal has given its Judgment in the case of Lock and others v British Gas Trading Ltd regarding holiday pay and commission.

The Tribunal has confirmed the European Court of Justice’s decision that commission should be taken into account when calculating holiday pay in the UK. It has achieved this by adding words into the Working Time Regulations to give effect to the Working Time Directive. In particular, it was decided that the definition of a ‘week’s pay’ that is used to calculate holiday pay should be re-written so that commission and similar payments are included when calculating holiday pay.

Further, any worker whose remuneration includes commission or similar payments should be treated in the same way as workers who do not have normal working hours and whose remuneration varies. Such workers have their holiday pay calculated by reference to their weekly average pay over a 12-week reference period.

Therefore, this should be the starting point for workers who earn commission also. However, the Tribunal declined to rule on how holiday pay should be calculated in Mr Lock’s case and the issue of whether a 12-week reference period is appropriate in this particular case will be considered at a further Tribunal hearing which is expected to take place later
this year.

What does this mean for employers?

It is now difficult, if not impossible, to justify excluding commission or similar payments from holiday pay calculations. However, before the Tribunal gave its decision, the parties agreed that the Tribunal’s decision would only be relevant to the four weeks’ paid holiday under the European Directive and it would not apply to the additional 1.6 weeks’ paid holiday which is provided for under the Working Time Regulations (or any additional contractual holiday). Therefore, this decision does not affect the additional 1.6 weeks’ paid holiday.

In addition, what constitutes ‘similar payments’ has not been clarified and needs careful thought. We also understand that British Gas has lodged an appeal against the Tribunal’s decision on the basis that British domestic law (the Working Time Regulations) should not be redrafted in this way. If this appeal is ultimately successful, the conclusions of the Bear Scotland case, as well as the Lock case, could potentially be overturned.

The specific details of the appeal (and whether the appeal will be allowed) are not yet known. However, this could be a possible reason to try to justify keeping the situation under review. We will keep you updated on the progress of the appeal.

Should voluntary overtime be included in holiday pay calculations?

Whilst the Bear Scotland case decided that non-guaranteed overtime should be included in holiday pay calculations, it did not make a decision about voluntary overtime. As a result, most employers are not including voluntary overtime in their holiday pay calculations.

However, in the absence of a definite ruling, the position is not clear cut. This issue is going to be considered later this Summer when the Northern Ireland Court of Appeal hears the appeal in the case of Patterson v Castlereagh Borough Council.

In this case, the Northern Ireland Industrial Tribunal originally held that the Working Time Directive does not require voluntary overtime to be taken into account when calculating holiday pay. In reaching this decision, the Industrial Tribunal had regard to the Bear Scotland case and took the approach that the EAT had implicitly excluded voluntary overtime. However, as the EAT’s Judgment in the Bear Scotland case did not deal with whether voluntary overtime should be included in calculating holiday pay, this has been appealed.

It will be interesting to see what the Court of Appeal decides. It is important to note that, whatever the outcome of the appeal, the decision will only be binding in Northern Ireland.

However, decisions from the Northern Ireland Court of Appeal are considered persuasive by British Tribunals and, therefore, the decision could influence future cases on holiday pay. Again, we will keep you updated on the progress of this appeal.

What should employers do now?

In light of the recent holiday pay cases, many companies have started to change their approach to holiday pay or, at least have carried out assessments of their potential liability. If you have not done so already you should:

  • Consider whether you make commission payments or other ‘similar payments’ such as travel payments (beyond just expenses) to workers and how those arrangements work in practice.
  • Review overtime arrangements to ascertain whether overtime is non-guaranteed or voluntary and how regularly overtime is used.
  • Assess the amount of overtime taken on average by workers in order to calculate the potential cost, going forward, of additional holiday pay for four weeks’ each year (and for the additional 1.6 weeks under the Working Time Regulations together with any further contractual leave if you want to take a consistent approach across all holiday entitlements).
  • Establish when workers took their last holiday to ascertain whether there is a gap of at least three months. If there has been a three month gap, they would be out of time to bring a backdated claim for prior holiday (based on the Bear Scotland EAT decision).
  • Ensure that holiday pay is calculated appropriately in your business in light of these legal developments or document your reasons for not making changes.

You may also want to bear in mind that, following the Government’s introduction of the Deduction from Wages (Limitation) Regulations 2014, any claims for back-dated holiday pay issued at the Tribunal on or after 1 July 2015 will be limited to a two year period prior to the claim.

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