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Cashing up holiday pay – a round-up of the current position

Calculating holiday pay should be simple. Well at least that used to be the case. As a result of the Employment Tribunal cases of Neal v Freightliner Limited and Lock v British Gas Trading Limited and others calculating holiday pay may now be a complicated conundrum, which may leave many employers confused.

Prior to the recent cases of Neal and Lock, calculating holiday pay was governed by regulation 16 of the Working Time Regulations 1998 (“WTR”) and sections 221 to 224 of the Employment Rights Act 1996 (“ERA”) which state that workers with normal working hours are entitled to a week’s holiday pay, which is equivalent to their normal weekly salary. In the event that the worker is entitled to overtime pay or commission, calculating their holiday pay would be dependent on a number of factors.

When would the calculation include overtime pay?

Under the WTR and ERA, if a worker is entitled to overtime pay as they worked in excess of a fixed number of hours (which may be their contractual hours), calculating their holiday pay would only include their pay for the fixed hours and not include any overtime pay.

However, if the worker did not have normal working hours, a week’s pay would simply be calculated as an average of the pay received in the preceding 12 weeks, which would also include overtime payments and commission.

What is the position for those workers with normal working hours who are entitled to commission?

Generally case law has held that if the payment of commission is ‘part of an entitlement for normal working hours’ or relates to the amount of work done, then it must be taken into account.

In May Guerney Limited vs Adshead and others the Employment Appeal Tribunal (“EAT”) held that where a worker was paid an attendance bonus for turning up and completing a full week’s work, the bonus was deemed part of an entitlement for working his normal working hours and therefore it should be taken into account when calculating holiday pay.

Although the WTR was derived from the Working Time Directive (“Directive”) they appear to adopt two different stances. The Directive sets out that workers have the right to four weeks paid annual leave, but is silent on how that holiday pay should be calculated and it has been left to the national courts to determine. European case law has established that workers should receive their normal remuneration during their holiday period. This definition was expanded by the Williams and others v British Airways plc case which held that workers should not only be entitled to their basic salary, but any other payments which are ‘intrinsically linked to the performance of their tasks’, which would include commission and overtime.

Since the Williams case, there is an argument that the WTR and ERA do not comply with the Directive’s requirements.

This argument was put to the test at the Employment Tribunal in the case of Neal v Freightliner Limited and was successful. The Employment Judge held that the employee’s overtime payments had to be taken into account when calculating his holiday pay in respect of the four week minimum required by the Directive.

Following on from this decision, the Employment Tribunal referred to the Advocate General for an opinion in the case of Lock v British Gas Trading Limited and others. The Advocate General held that when commission is also directly linked to work, it should also be included in the calculation of holiday pay.

Comment

It appears from the above cases that the Employment Tribunal is willing to interpret the WTR and ERA to give effect to the Directive’s requirements which applies a less stringent test when determining what should be included in the calculation of holiday pay. This could have far reaching implications for employers in respect of their purse strings. We would advise that employers tread with caution when calculating holiday pay until we receive definitive guidance from the EAT or Court of Appeal on these points, as these cases have been at Employment Tribunal level and therefore are not binding. At present, we are aware that the Neal case has been appealed and is due to be heard by the EAT. So watch this space, the conundrum may be solved soon.

For more information please contact Mark Hammerton, Head of Employment at DWF.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.