by James Willis, Head of Employment at stevensdrake solicitors

If you work in HR or employment law then, like me, you may have become a bit of a ‘holiday pay bore’ over the last few years. First we had the whole thing about whether holiday continues to accrue during sick leave. Now, we have all become obsessed with the question of whether we have to factor in overtime, commission and other similar payments when calculating holiday pay. This second issue is in danger of being even more complicated than the first. Whilst the overall picture remains uncertain, I thought that now might be a good time to answer a few of the most frequently asked questions on holiday pay and consider how things might develop over the coming months. Q: Do we have to factor in commission payments when calculating workers’ holiday pay?

A: As things stand, yes.  In the widely reported case of Lock v British Gas, the European Court of Justice ruled that commission payments paid to workers as part of their ‘normal remuneration’ should be factored in when calculating holiday pay.  

Q: What about overtime payments? And does it matter whether the overtime if compulsory or voluntary?

A: So far, the case law has identified 3 forms of overtime.  I will look at each of them in turn: 

• Compulsory overtime:  This is overtime that the employer is obliged to provide and the employee is obliged to work.  This should be factored in when calculating holiday pay;
• Non-guaranteed overtime:  This is overtime that the employee is not obliged to provide.  However, where it is provided, the employee is required to work it.  In the case of Bear Scotland v Fulton, the EAT concluded that this sort of overtime should also be factored in when calculating holiday pay;
• Voluntary overtime:  This is overtime that the employer is not obliged to provide and the employee is not obliged to undertake.  Some questioned whether this form of overtime might be the exception to the rule.  However, in truth, it came as no surprise when the very recent case of Patterson v Castlereagh Borough Council concluded that even voluntary overtime is likely to be relevant when calculating holiday pay.  Now it is worth bearing in mind that the Patterson case is a Northern Ireland decision.  So it doesn’t formally bind English Employment Tribunals.  However, it is most certainly persuasive and I strongly suspect that our Tribunals would reach the same conclusion.

Taking all of the above into account, whichever way you slice it, if you routinely pay your staff overtime, you are probably going to have to factor it into your holiday pay calculations.

Q: Are there any other payments that we need to factor in?

A: The underlying intention of these various decisions is to ensure that when workers go on holiday, they receive pay that is consistent with what they would have received had they remained at work.  Otherwise, workers may be discouraged from taking holiday and this is bad for people’s health and safety.  So, whilst the case law has tended to emphasise the situation in relation to overtime and commission, the same principle applies to any and all other payments that a worker would expect to receive in relation to the normal performance of their duties.  That could include anything from ‘on-call payments’, to ‘acting up allowances’ to ‘shift premiums’.

Q: When did the law change and why were we not made aware of this at the time?

A: Technically speaking, the law hasn’t changed at all.  Instead, it is simply the case that the European Court of Justice and other courts and tribunals have now issued judgments that clarify the law and show that we have been misunderstanding and misapplying it for the last 15 years! 

Q: Is there any chance of the law ‘changing’ again or being clarified further?

A: It is certainly still possible that further decisions will come along and more clearly set out what employers should be doing.  For example, the Lock v British Gas decision is currently being appealed to the Employment Appeal Tribunal.  However, if you are hoping that all these issues are going to go away and you can safely continue to pay holiday pay without factoring in commission and overtime payments then, realistically, you are going to be disappointed.

Q: Where are we with regard to the risk of historical claims for holiday pay?  I have heard that we could be hit for arrears of holiday pay going back to 1998.

A: Here, I have some good news to report.  With effect from 1 July 2015, any claims for holiday pay can only seek to go back a maximum of 2 years from the date on with the claim is filed.  Additionally, the law has been changed to make it clear that claims under the Working Time Regulations 1998 cannot be brought as breach of contract claims in the County Court, which once again helps to reduce the risks for employers.

Q: Do the recent rulings in relation to holiday pay apply to the 4 weeks’ paid leave guaranteed by the European Working Time Directive or the 5.6 weeks’ paid leave guaranteed by the our own domestic Working Time Regulations 1998?

A: At present, the case law suggests that they apply only to the first 4 weeks’ paid leave.  So whilst you may be obliged to factor in overtime and commission when paying holiday pay in relation to the first 4 weeks’ holiday in any given holiday year, you may then be entitled to pay a lower rate of pay for the remaining 1.6 weeks’ leave.

Q: And what if we provide our staff with a more generous entitlement to paid holiday under our contracts of employment?

A: Again, subject to the terms of your contracts of employment, you are free to pay a lower rate of holiday pay in relation to any contractual holiday that your staff are entitled to take.  However, you will have to give some thought to the question of how easy it is going to be, from an administrative point of view, to pay different rates of pay for different parts of your workers’ holiday entitlement.

Q: Can you foresee any further legislative changes in the imminent future that might have a bearing on the situation?

A:No, not at the present time.  But you might want to keep an eye on our website and newsletters for further updates.

Q: Surely these decisions won’t impact on the quarterly or annual bonuses that we pay to our staff?

A: At present, the answer to this question remains unclear.  Logically, much will depend on whether the bonus scheme has the potential to discourage staff from taking their holiday entitlement.  If the scheme takes account of people’s holiday and ensures that staff can receive a full bonus whilst still taking 4 weeks’ leave each year, then common sense suggests that you should not have to factor bonus payments into your holiday pay calculations.  However if by taking less holiday, employees increase their prospects of earning the highest bonus, then there is still a risk that the courts and tribunal may see things differently.

Q: Is now the time to bite the bullet and start paying our workers a higher rate of holiday pay?

A: Possibly.  Until now, many businesses have been reluctant to change their holiday pay policies, not least for fear of flagging up the issue to their employees and triggering a raft of claims for years’ worth of unpaid holiday pay going back into the dim and distant past.  As set out above, to some extent, the risk of claims for historical holiday pay is now more limited and the potential liabilities are more quantifiable.  This might well persuade more businesses to grasp the nettle and start the process of reviewing their holiday pay arrangements.

Q: On a slightly separate note, have there been any developments on the issue of how holiday pay accrues during sick leave?

A: The recent case of Plumb v Duncan Print Group Limited has confirmed that the 4 weeks’ holiday guaranteed by the European Working Time Directive continues to accrue during sick leave.  All things being equal, the employee can take the holiday whilst on sick leave or carry it forward to the following holiday year.  However, holiday cannot be carried forward indefinitely.  Instead, this case suggests that it must be used up no later than 18 months from the end of the holiday year in which it accrued.  

Q: Finally, please may I go and have a lie down in a darkened room?

A: Yes.