Happy Holidays? Are you calculating your employees’ holiday pay correctly?
7th July, 2015
For employers who offer paid overtime, use commission based incentives or offer other paid allowances/bonuses, the calculation of holiday pay continues to be challenging. The latest case from the Court of Appeal in Northern Ireland does little to assist by ruling that voluntary overtime may also need to be included in the calculation of a worker’s holiday pay. Sally Gwilliam, Senior Employment Solicitor, guides you through this latest decision and provides a summary of the current legal position.
The Northern Ireland Court of Appeal (NICA) ruled last week in the case of Patterson v Castlereagh Borough Council that voluntary overtime (i.e. overtime which an employer has the discretion to offer, and which the employee can refuse to work) may in certain circumstances have to be included in the calculation of holiday pay.
The NICA held (in overturning the Industrial Tribunal’s decision), that there is no legal principle that voluntary overtime cannot be included in the calculation of holiday pay, and that it is a question of fact for each case. While decisions of NICA are not binding on the courts of England and Wales, they are a persuasive authority.
So does it change anything?
This decision is the first to address voluntary overtime directly and makes clear that voluntary overtime is not automatically excluded from the calculation of holiday pay. In practice, however, it probably changes little and re-emphasises what we know already, that employers should calculate holiday pay based on a worker’s “normal remuneration”. In some instances, where an employee works voluntary overtime on a regular basis with some permanence, then such pay should likely be included in the calculation of holiday pay.
What is the current legal position?
Decisions in both the European Court of Justice and the Employment Appeal Tribunal over the last 12 months have had a dramatic impact on how employers should calculate holiday pay.
Previously, for workers with normal working hours, employers would calculate holiday pay based on their basic salary only. This calculation will no longer be compliant legally where these workers receive additional elements of pay, which are linked intrinsically to the work that they carry out. To this end, we can be certain that non-guaranteed overtime (i.e. overtime which the employer does not have to offer, but if they do, the individual is required to work), certain commission payments, certain travel payments and certain bonus payments should now be included in the calculation of holiday pay.
The basis for these decisions is to ensure that employees are not deterred from taking holiday because either:
(i) they will be paid less while on holiday than the normal remuneration that they would have received while at work; or
(ii) they lose the opportunity to earn other elements of pay while on holiday, for example commission.
It seems unlikely that these decisions will be overturned, and if anything, more elements of variable pay may subsequently be included as case law develops. As ever, the difficulties for businesses now, are implementing these rulings practically given the limited guidance that has been offered and the number of questions that remain unanswered.
The biggest question for employers, in addition to what elements of pay should be included, is what reference period should be used when calculating a worker’s average normal remuneration. This question remains unanswered as the courts have failed to address this point directly. At present, however, legal opinion suggests that a 12 week reference period would be difficult to challenge.
Other key points to note:
• These rulings only apply to four weeks of holiday (being the minimum holiday every worker must receive under the European Working Time Directive). Therefore the additional 1.6 weeks holiday that workers must receive under the UK Working Time Regulations 1998 are not caught within this regime (nor is any additional contractual holiday that workers receive). So employers have the choice of having the administrative headache of paying different levels of holiday pay for different numbers of days’ holiday taken, or take the decision to apply this regime to all holiday pay.
• From 1 July 2015, any claims that are issued by a worker after this date for unpaid holiday, can only claim the previous two years’ holiday pay (giving employers some comfort in this challenging era).
So, what does this mean for businesses?
This is by no means the end of decisions to be made in this area. One thing we can be sure of, however (subject to the UK leaving the EU any time soon), is that this regime is here to stay. We recommend that all employers consider precisely what needs to be included in the calculation of holiday pay for their employees (i.e. what constitutes “normal remuneration”). One option of course, is for employers to do nothing at this stage, and wait and see if their workers bring any claims, but this decision should be informed. Other employers may look at their working arrangements to try to minimise their increased liability for holiday pay (by, for example. revising commission plans and payment schedules).
If you would like to discuss how these changes might affect your business, or any other employment law issues, please contact Sally Gwilliam, Senior Employment Solicitor at Genus Law on 0113 320 4540.