Calculating statutory holiday pay: the latest

Overview

In this briefing we will concentrate on holiday pay due under the Working Time Regulations, the British legislation implementing the EU Working Time Directive.  Their interpretation has changed significantly over the 20 or so years since they were introduced, thanks to some important decisions from the European Court of Justice.  

These ECJ rulings generally apply only to the four weeks of paid leave guaranteed by the Directive.  They do not normally extend to the further 1.6 weeks’ entitlement conferred on British workers by the Directive, or to any contractual holiday in excess of the combined statutory leave of 5.6 weeks.  However, many employers choose to apply the same rules for all types of holiday entitlement, not least because it makes life much easier administratively.

Three key points have emerged from case law in the past few months, which are explored in more detail in the rest of this briefing:

• As the law stands, voluntary overtime should be included in the calculation of holiday pay in most circumstances;
• For casual and atypical workers, it is important to apply the rules on reference periods where possible, even though this may result in them receiving a higher rate of holiday pay than workers who work steadily throughout the year;
• It is possible that the Bear Scotland rule about backdated claims – which says that a gap of three months of more between underpayments cannot be bridged – may be challenged in future holiday pay litigation.

What should be included in holiday pay?

It is now clear that the Regulations need to be interpreted so that all elements of pay which form part of “normal” remuneration should be taken into account.  This would include regular bonuses, result-based commission and most overtime.

There has been some uncertainty about how this principle should be applied to purely voluntary overtime – ie overtime that the employer is not contractually required to offer and which the worker is not obliged to work.  The Court of Appeal has recently confirmed that, in the light of EU case law, this kind of overtime should be reflected in holiday pay if worked with sufficient regularity.  However, the employers have applied for permission to appeal to the Supreme Court.

How should it be calculated?

The normal rule is that the holiday pay should be calculated using the worker’s average weekly pay, based on a 12 week reference period ending immediately before the holiday is taken.  It is now clear that that this reference period will have to be adjusted if it would leave out of account payments that, while not received in the 12 week reference period, would amount to part of the worker’s “normal” remuneration. As from April next year, these problems should largely be eliminated by amendments to the Regulations which will bring in a 52 week reference for these calculations.

It has not been clear how these rules should be applied to casual workers, especially those working on on-off assignments.  A common practice in these situations is to calculate holiday pay at 12.07% of the pay for each assignment and pay it at the end of the assignment.  That reflects the fact that statutory holidays represent 12.07% of hours worked during the year (ie 5.6 weeks’ holiday as against the remaining 46.4 working weeks in each year), and that a payment in lieu of holidays not taken is permissible at the end of the contract.

Currently these is nothing in the Working Time Regulations to sanction this practice, but as from April 2020 a further amendment will be introduced which will allow employers in these circumstances to base holiday pay on a calculation which “fairly represents” a week’s pay if there is no workable reference period. 

It is now clear that the 12.07% calculation should not be adopted even if using a reference period produces a much higher rate of holiday pay than a permanent full time worker would accrue.  One particular example to emerge recently is term-time only workers.  Assuming they are engaged throughout the year, their holiday pay should be based on their term-time pay, even though this means that they receive more holiday pay than they would have been entitled to, had their hours been spread evenly throughout the year.

What about backdated claims?

The strict time limits in the Working Time Regulations give workers very limited scope to bring back-dated claims.  However overlapping provisions in the Employment Rights Act allow claims to be based on a “series” of “unlawful deductions” from wages.  For these kind of claims, the time limit does not start to run until the last of the relevant deductions (ie the last occasion on which statutory holiday pay was underpaid).

That meant that until a few years ago it was theoretically possible for a worker to back-date a claim for underpaid holiday pay to the start of the working relationship.  In July 2015 new rules were introduced which limited such claims to two years prior to the commencement of proceedings.  There is also a 2014 judgment from the Employment Appeal Tribunal in the Bear Scotland litigation, which says that any gap of more than three months between underpayments will break the series of deductions.  Earlier this year the Northern Ireland Court of Appeal disagreed with this analysis when interpreting the equivalent legislation that applies there.  However, its ruling is not binding on the EAT, though it may be persuaded to revisit the point in future litigation.

Will anything change as a result of Brexit?

The short answer is no.  Brexit itself will not change the Working Time Regulations, or the way they are interpreted.

The slight qualification is that as things currently stand decisions of the European Court of Justice reached after the UK leaves the EU will not be binding on the UK courts, though they will still be highly influential.  And while the UK may in the future be free to depart from the Directive by amending the Regulations, such a step is unlikely in the short- term.