Holidays : Calculating the cost

UK law entitles all employees to 5.6 weeks paid annual leave (28 days for full time workers which can include bank and public holidays). This is comprised of a basic 4 week entitlement plus an additional 1.6 weeks. For employees whose hours of work and rate of pay do not vary, calculating holiday pay is a straight forward affair as the calculation is the same whether they are at work or on holiday. However, for employees with non-standard hours, or who are paid commission, work overtime or are entitled to specific payments such as flight allowances, the calculation is not so straight forward. What is a “week’s pay” in these circumstances?

A number of cases have offered guidance on this point:- 

1. BA –v- Williams (2011] IRLR 948. Mr Williams was a pilot and received a) basic pay, b) “flying time” pay and c) supplements when away from base. His holiday pay was calculated by reference to his basic pay which meant he was financially worse off when on annual leave.   Mr Williams brought a claim. The European Court of Justice (ECJ) decided that Mr Williams’ pay had been incorrectly calculated. It decided that whilst on annual leave, Mr Williams should receive his basic pay plus any payments that were “intrinsically linked” to his role as a pilot, such as flying time pay. However, if felt that any occasional or ancillary costs, eg those relating to time spent away from base, should not be included. 
2. Lock –v- British Gas Trading [2014] IRLR 648. Mr Lock was a salesman for British Gas and received “basic pay”, and “commission” based on sales achieved. The “commission” element represented over 60% of Mr Lock’s salary therefore there was a real disincentive for him to take annual leave due the consequential reduction in his pay. As in Mr Williams’ case, the Court agreed with Mr Lock that his holiday pay should include a percentage of commission as this was “intrinsically linked” to his role as a salesman. 
3. Bear Scotland & Others v Fulton & Others [2015] IRLR 15. In conjoined appeals, the court was asked to decide a number of points including whether overtime should be included in the calculation of holiday pay. The Court responded in the affirmative finding that non-guaranteed overtime, (ie overtime that an employer is not obliged to offer but which the employee must perform if offered), should be included in the calculation of holiday pay.
4. In Patterson v Castlereagh Borough Council, the Northern Ireland Court of Appeal was asked to decide whether or not voluntary overtime(ie overtime the employer is not obliged to offer and the employee not obliged to accept) should be included in the calculation of holiday pay. It held that, in principle, there is no reason why it should not be but that each case will be decided on its own facts. Although this case is not binding on the Courts in England and Wales, it will surely be persuasive.

Increasingly, it seems, courts are finding that a “week’s pay” for the purposes of calculating holiday pay is the same as an employee’s regular take home pay. Each case turns on its own facts and such a conclusion is too simplistic in what remains a complicated area of law. For example, would commission be payable just for the basic 4 week entitlement, the additional 1.6 week entitlement or the contractual entitlement if different?

Simply believing that commission is an “intrinsic” part of someone’s role (and therefore payable) does not answer the difficult question of how to calculate what is due. If, for example, a company is subject to seasonal variations and 90% of its non-guaranteed overtime takes place in the two weeks before Christmas when an employee is on holiday, is the employee entitled to be paid overtime? If commission varies from month to month, how do you work out what an employee would have earned in that two week period? Although the above cases are useful, they do not provide practical answers about how to implement these judgements. We would be happy to work with employers to deal with these issues.    

In response to the changing definition of holiday pay, the Government introduced new legislation (which came into effect on 1 July 2015), limiting the amount of back dated holiday pay an individual can claim to two years. The change will no doubt be welcomed by employers concerned about the potential cost of claims for unpaid holiday pay. However, this remains a complicated area of law which will no doubt be the subject of further litigation.

Debbie Sadler

Published on 30/06/2015