This last few months has seen some further cases and announcements in the long running series of questions relating to holiday pay which still seems a long way from resolution.

Questions which have been addressed are:

  1. How is holiday pay calculated for a worker whose pay varies?
  2. If a worker claims unpaid or a shortfall in holiday pay, how far back can they claim?

How is holiday pay calculated for an employee whose pay varies?

The Working Time Regulations 1998 which set out workers rights to paid annual leave, refer to the definition of “a week’s pay” in the Employment Rights Act 1996 sections 220 – 224.

S 221 (3), 222 and 224 deal with the situations where pay varies according to the amount of work done, or the time of work or when the worker has no normal working hours. An employee whose pay or hours vary is entitled to be paid holiday pay based on the average number of weekly normal working hours at the average hourly rate of remuneration over the previous 12 weeks. If there are no “normal hours,” the calculation is based on their average pay during the previous 12 complete weeks they have worked.

However, over the last few years, cases have established that in order to be compliant with the European Working Time Directive, extra income from commission, overtime or other payments should be taken into consideration, even if these would not be described as “normal working hours.”

Commission

In the case of Lock v British Gas [2014] it was held by the European Court that a worker who is partly paid by commission is entitled to have their commission payments taken into account when calculating their holiday pay where the commission payments are “intrinsically linked” to the performance of tasks required to be carried out by a worker.

The case returned to the Tribunal in February this year. The Leicester Tribunal held that the Working Time Regulations should be interpreted so that an employee’s holiday pay includes an element of commission.

Bonus Payments

Bonus payments which are also “intrinsically linked” to the performance of a worker’s duties should be included, but there are no reported cases which suggest that a bonus which is linked to other factors, e.g. the employer’s overall profitability, need to be included.

Allowances on top of basic pay

In the case of Williams v British Airways [2011] the European Court held that if an employee’s income consists partly of allowances on top of basic pay these should also form part of the calculation of holiday pay if they are intrinsic to the job itself. If the allowances are intended to exclusively cover expenses (e.g. mileage claims) they are not included.

Overtime

Recently in the Employment Appeal Tribunal in the case of Bear Scotland v Fulton [2014] , it was held that payment for overtime must also be included in the calculation of “a week’s pay” whether that overtime is guaranteed compulsory or voluntary.

Claims for holiday pay

A worker who has been denied holiday pay due to them, either because the employer refuses to give them any or all their paid holiday entitlement, or because the holiday pay has been wrongly calculated may claim unpaid holiday pay. Typically these claims are made after their employment terminates and the worry for employers is of facing large claims for a shortfall in holiday pay going back many years.

These claims are based on an “unlawful deductions from wages” which must be brought within 3 months of the deduction or 3 months of the last of a series of deductions.

In the recent case of Bear Scotland v Fulton [2014]   the Employment Appeal Tribunal held that if a worker leaves a gap of more than 3 months between unpaid or part-paid holiday leave, any claims for payments due before that time cannot be counted as part of a series of deductions.

Employers should also take some comfort from the Deductions from Wages (Limitation) Regulations 2014, which came into force on 8 January 2015. The Regulations provide that for most claims for unlawful deduction of wages, there is a 2 year limit to back pay. This applies to claims concerning commission, holiday pay, bonuses, fees and other emoluments. The Regulations apply to claims presented on or after 1 July 2015.

So for an employer facing a claim of unpaid holiday pay going back a number of years, the first thing to do is to check when the last period of time was when for over 3 months the worker was not paid or due any paid annual leave. This may include bank holidays, and the claim will only apply to a shortfall in holiday pay after that date. As payment for bank holidays are likely to fall due in January, April, May, August and December, in many cases the only time of the year where there is scope for finding a break of more than 3 months would be from September to November.

However, where a worker claims unlawful deductions from wages (which includes holiday pay claims not based on an explicit contractual entitlement), if the claim is brought after 1st July 2015, then the most arrears a worker can claim will be 2 years

For further information on employment law matters, please speak to Jade Linton on 0121 746 3300 email, j.linton@sydneymitchell.co.uk or complete our online enquiry form.

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