Holiday Pay – Club Med or a wet weekend at Butlins? Part 2
Paul Kelly, Partner in the Employment Law Team at Leeds-based law firm, Blacks Solicitors LLP.
How Should Holiday Pay be Calculated . . . for the moment?
In our previous instalment on the subject of holiday pay , we touched on the ECJ decision in the case of Lock v British Gas (which confirmed that regular commission should form part of holiday pay) and the EAT decision in Bear Scotland Limited v Fulton (which confirmed that non-guaranteed overtime and travel payments should also be accounted for).
The Unite union has recently announced that it does not intend to appeal the Bear decision. But this does not mean that the legal principle underlying the decision will remain unchallenged. Given the importance of the decision to those businesses heavily reliant on commission, non-guaranteed overtime and travel payments, there’s every chance that other litigants will take the matter to the Court of Appeal for a further ruling by a higher court. What is clear is that, as the law currently stands, employers should start paying their employees holiday pay based on their average earnings (taking into account non-guaranteed overtime and commission earned) over the 12 weeks prior to them taking holiday.
As we pointed out in Part 1, this new approach to calculating holiday pay applies only to the 4 weeks period of leave required to be provided by employers under the Working Time Directive (WTD). The additional 1.6 weeks (8 days) provided under the Working Time Regulations (WTR) can still be paid at the basic rate. Whilst the legal consensus appears to be that the 4 weeks period of WTD leave is to be treated as automatically used by the employee before the additional 1.6 weeks WTR leave, employers may nonetheless stipulate that statutory bank holidays form part of the additional 1.6 weeks required under the WTR. What factors will influence that choice?
If an employer stipulates that statutory bank holidays form part of the additional 1.6 WTR weeks, those bank holidays will be paid at the basic rate. Equally importantly, making those payments at the basic rate may have the effect of breaking up any ‘series’ of connected enhanced holiday days – and we will look at the importance of a “series” of holiday payments in more detail in Part 3.
If, by contrast, statutory bank holidays are part of the WTD 4 weeks’, they will be paid at the enhanced “averaged” rate and employees will use up that enhanced holiday sooner in a typical holiday year. This means it will be harder for them to take holiday “tactically” so as to benefit from peak commission/overtime periods.
Whichever of the two options is chosen, employers will need to operate a two-tier holiday pay system to determine whether employees are entitled to enhanced or basic rate holiday – unless, of course, an employer generously decides to pay the “averaged” rate for all holidays, regardless of whether they derive from WTD or WTR.
A final, but material, consideration is the contractual position on holiday pay. Most contracts of employment and staff handbooks will say that employees will be paid at their basic rate whilst on holiday. We recommend that employers preserve this position. Employers should confirm to their employees that, in accordance with recent case law, holiday pay will be paid at an enhanced rate for the 4 weeks derived from WTD – but that such enhanced payments do not constitute a variation to their contracts of employment. Employers should add that in the event that the legal principle underlying Bear is successfully challenged in the future, employers will not be contractually bound to carry on paying enhanced rates.
After the first two of our three instalments on holiday pay, it looks like some employees may think they should be booking that Club Med holiday. But in our final instalment we will look at what is meant in this context by the word “series” and the implications for retrospective claims for unlawful deductions from wages. As we will then see, the forecast for Mediterranean sun may seem rather optimistic. Better pack an umbrella.
