With the cost of living soaring there has been an increase in the number of employees challenging their employers in tribunals over holiday pay. An underpayment in holiday pay will usually amount to an ‘unlawful deduction from wages’ and a claim can be presented to an Employment Tribunal within 3 months of the deduction, or 3 months of the last in any series of deductions. Such a claim would normally be time limited to the deductions made during the previous 2 years, but in some circumstances claims can be made spanning he previous 6 years.
With that in mind, employers are being urged to check their practices in an area of law which can leave many scratching their heads (and yearning for a holiday themselves!).
A health and safety entitlement
The right to paid leave applies to all workers, not just employees, and therefore covers a large proportion of the working population. It has its rationale firmly grounded in health and safety principles – paid holidays are there to ensure workers have appropriate time away from work to rest and recuperate, promoting good mental and physical health.
Holiday pay needs to be accurately calculated to ensure workers are not discouraged from asserting their right to paid leave, by being left out of pocket as a result.
What is the entitlement?
The statutory entitlement in the UK is 5.6 weeks of paid leave although employers can choose to offer more if they wish. Any additional leave would then be a contractual, rather than a statutory, entitlement.
How are bank holidays treated?
The quick answer is that there is no statutory right to take holiday on a bank/public holiday as long as all workers receive at least 5.6 weeks of annual leave in total. So if you allow employees to take holiday on bank/public holidays, this can be included in the 5.6 weeks.
What about part time workers?
A part time worker will be entitled to the same holiday entitlement, in terms of weeks, as a comparable full-time worker. This will correspond to a pro-rata number of days, e.g., An employer provides its full-time workers with the minimum statutory holiday entitlement of 5.6 weeks (28 days). A part-time worker works 3 days per week. They are also entitled to 5.6 weeks, which for them amounts to 16.8 days.
What about bank holidays for part time workers?
If the 5.6 weeks entitlement of the full-time worker includes bank holidays, the part-time worker’s entitlement will also include any bank holidays on which they would otherwise be required to work. So for every bank holiday that falls on one of their working days, they will have one day deducted from their annual entitlement of 16.8 days.
How have holiday pay calculations changed?
Calculating holiday pay used to be relatively straightforward as it was based only on the worker’s basic pay. However, a number of cases brought before the European Court of Justice in recent years have changed this position.
How is the EU relevant?
The right to paid leave has its roots in a European Union Directive (Working Time Directive) which was then incorporated into Domestic legislation (Working Time Regulation 1998). The EU core right covers 4 weeks of leave per annum. The Domestic legislation subsequently added 1.6 weeks to give workers in the UK a statutory right of 5.6 weeks of annual leave. This distinction between the 4 weeks ‘basic’ or ‘core’ leave and the 1.6 weeks ‘additional’ leave remains relevant in how statutory holiday pay is calculated.
Domestic versus EU
The Domestic legislation covers 3 simple scenarios to ascertain pay (Employment Rights Act 1996, chap II) ;
- Normal working hours and pay does not vary according to the amount of work done (e.g., salaried workers)
- Normal working hours but the pay varies according to the amount of work done (e.g., piece workers)
- No normal working hours (e.g., zero hours workers)
In the first scenario holiday pay is straightforward – the worker will receive their basic contractual pay when on holiday leave.
In the second and third scenarios, the holiday pay will be calculated based on a 52-week average including all the elements of pay.
The EU case law however has introduced further layers of complexity, which technically only apply to the core 4 weeks of holiday entitlement. However, many employers will treat both parts of holiday (core and additional) the same, due to the administrative burden involved in differentiating between them.
The overall principle introduced by EU case law revolves around the notion of payments which are ‘intrinsically linked to the performance of the tasks’ being included in the calculation of pay for holiday pay purposes. Currently, UK courts must take account of derived EU legislation in their judgements until such judgements are repealed under new domestic legislation.
In practice what does it mean?
A couple of examples to illustrate this in practice; commission, bonus and overtime.
Commission and bonus
Under domestic law a salesperson earning commission would only be entitled to basic pay during periods of holiday leave in line with scenario 1.
However, under EU law commission will need to be included on the basis that commission rewards the worker for actions ‘intrinsically related to the performance of the tasks’ under the contract of employment.
In terms of bonuses, a company-wide bonus based on business profitability overall would not be included, as it is not intrinsically linked to the individual’s performance of the individual’s tasks, but a productivity bonus, which reflects the amount of work done, would need to be included.
Under domestic law, overtime would only be included in holiday pay calculations if it was contractual (i.e., guaranteed). However, under EU law it merely needs to be broadly regular and predictable to become relevant. Only payments for overtime which is truly voluntary and irregular are still likely to be able to be excluded.
When does the 52-week average apply?
The requirement to calculate holiday pay based upon the average of the preceding 52 weeks only technically applies to situations where there are no normal working hours, e.g., a zero-hour worker. In terms of calculating holiday pay where commission and bonuses need to be accounted for, the EU cases do not actually specify a particular time period over which this must be calculated, but 52 weeks has been suggested in some of the case law and would appear to be a sensible approach in line with the overall aim of the legislation.
The weeks used for the average should be weeks where the worker has been remunerated for work done. As such, any weeks in which the worker has not received any pay would be excluded, and extra weeks added on to achieve 52-weeks’ worth of suitable data.
What about part-year workers or casual workers with irregular shift patterns?
We need to first distinguish between the two.
A part-year worker is someone who does not work all year round, but who is still bound by a ‘continuous’ employment contract during the period when they are not working, e.g., a term-time worker.
In the case of Harpur Trust v Brazel, the Claimant was employed at one of the Trust’s schools and her working hours were usually between 10 and 15 hours per week on a term-time basis only. The school calculated Ms Brazel’s holiday pay by taking 12.07% of the hours worked, thus pro-rating her holiday on the basis that she only worked part of the year. 12.07% was used on the basis that 5.6 weeks is 12.07% of 46.4 weeks which is the number of weeks worked for someone working all year round and it was therefore considered an appropriate way to calculate holidays in more atypical working scenarios.
The Court of Appeal rejected this approach. The legislation states that workers are entitled to 5.6 weeks of annual leave per year and there is no mention of pro rating for someone who only works part of the year whilst still being employed for all of it. They are entitled to 5.6 weeks of paid leave and the amount they receive for each week of leave is calculated based on the normal principles outlined above. This may lead to term-time workers receiving, proportionately, more leave than full year workers, but this was found to be a necessary consequence of the legislation as it currently stands.
Note that a part year worker is not the same as a worker whose contract terminates part way through the year. In the latter case, holiday entitlement at the date of termination is naturally calculated on the basis of the proportion of the leave year that the worker has been engaged.
A genuinely casual worker who is not subject to an overall obligation to the employer to accept work, and where there is no overriding employment contract tying the parties into a continuous relationship, will have holiday accrue based on the actual time worked on each discrete assignment. On the basis of 5.6 weeks leave per year being the entitlement, the worker would accrue approximately 2.3 days of leave for every one month worked. To calculate the amount of holiday pay for each day of holiday the employer would calculate the average daily pay over the last 52 weeks preceding the holiday, as discussed above.
The situation can be more complex for ‘zero-hour contracts’, which can either amount to contracts of employment or truly casual worker agreements, depending on the facts of the case. As with many of the issues outlined above, seeking competent and timely legal advice is crucial.
This is just a ‘whistle-stop tour’ of a complex area. To guide you through the intricacies of the process in more detail, EML will be holding a FREE webinar on Thursday 4 August at 10.00am. Please visit Eventbrite for more details.