Guides & Advice

Holiday pay – where are we now?

Published: 8th February 2021
Area: Corporate & Commercial

It was back in 2006 that the European Court of Justice first confirmed that employees with variable pay must receive their “normal remuneration” when taking holiday. However, the practical impact of this principle wasn’t really felt in the UK until the case of Williams v British Airways some six years later.

The fundamental principle underpinning this ruling is that workers should not be financially disincentivised from taking holiday. From this principle we can formulate a basic rule of thumb: if an employee suffers a drop in earnings as a result of taking holiday, something is probably wrong.

Over the following years the UK courts have grappled with the concept of “normal remuneration”, most notably in the widely-reported Bear Scotland case. Thanks to this body of case law, we now have some certainty as to the correct approach to adopt when calculating holiday pay. However, there are still a number of grey areas.

Before turning to the detail, a quick reminder that, because this approach to calculating holiday pay stems from European case law, the “normal remuneration” rules only apply to the four weeks of holiday provided under the European Working Time Directive.

What is the European Working Time Directive?

The Working Time Regulations, which bring the directive into force in the UK, provide for 5.6 weeks of holiday. As such, these rules do not apply to the extra 1.6 weeks, nor to any extra holiday an employer may provide over and above the 5.6 week minimum (more on the European / Brexit angle below).

What is included in holiday pay?

We have a pretty good idea about which elements of pay need to be included when calculating holiday pay. Some of the most common pay elements that either do or may need to be included are:

  • Compulsory overtime – it is clear that overtime an employee is contractually obliged to work should be included
  • Commission – likewise, it is clear that short term commission payments (as opposed to longer term bonuses – see below) need to be included
  • Standby / call-out payments and shift premia – again, it is quite clear that regular payments of this nature need to be included in holiday pay calculations
  • Voluntary overtime – initially one of the most hotly-debated elements, it is now clear that voluntary overtime does need to be included if (and it’s a big if) such payments are made regularly over a sufficient period of time
  • Bonuses – there is still plenty of scope for debate in this area. It is reasonably clear that short-term, productivity-based bonuses will need to be included (these are tantamount to commission payments). At the other end of the scale, completely one-off bonuses won’t need to be included. However, the majority of bonus payments, most notably annual discretionary bonuses, fall somewhere between these two extremes.

On the one hand, bonus payments are arguably part of "normal remuneration", particularly if received on a regular basis over a number of years. On the other hand, it could be said that the payment of a bonus (particularly an annual bonus) takes into account the fact that an employee will take their holiday entitlement during the year. This goes back to the fundamental principle outlined above, the argument being that the employee does not suffer any drop in bonus earnings as a result of taking holiday. Expect plenty of litigation in this area over the coming months and years.

What are the remaining uncertainties?
What amounts to “sufficiently regular” in relation to voluntary overtime payments?

Unfortunately, there are no specific rules here. Instead, this is one of those areas where each case will turn on the specific facts.

This is an unhelpfully uncertain position for employers, so guidance will have to be taken from the published decisions in this area. There is little to go on as things stand, although, the Employment Appeal Tribunal found in Dudley Metropolitan Borough Council v Willetts that overtime worked one in every four or five weeks was sufficiently regular to count as normal.

What is the correct reference period for calculating an employee’s “normal remuneration”?

The courts are yet to give a definitive finding on this point, although it was widely thought that 12 weeks was the most likely reference period. The reason for this is simply that 12 weeks is the prescribed reference period that has always applied when calculating holiday pay for employees with no regular working hours.

However, as of 6 April 2020, this reference period was increased to 52 weeks - so there is a logic in saying that this should be mirrored for the “normal remuneration” calculations.

Can an employer choose which holiday taken by an employee is the “European” four weeks (where the “normal remuneration” approach is required) and which is the extra “UK” holiday?

The answer is possibly yes, but we don’t have a definitive decision on this yet. The Employment Appeal Tribunal suggested in non-binding comments that it is for employers to choose, but the Court of Appeal in Northern Ireland (not binding on other UK courts) found that any sort of designation of holiday in this way isn’t possible. This question is therefore very much still open to debate.

What impact will Brexit have on holiday pay?

In the short-term, there will be no impact at all because domestic UK legislation must continue to be interpreted in line with EU law as it stood at the end of the transition period.

The Court of Appeal and Supreme Court can depart from EU case law, but whether they do so in practice remains to be seen. There are a couple of cases on holiday pay due to be heard in the Supreme Court in June 2021, so watch this space.

However, in the longer term, the government may choose to legislate to change the position in the UK, and Business Secretary Kwasi Kwarteng recently confirmed that his department would be conducting a review of how EU-derived employment rights could be changed post-Brexit. Kwarteng insisted that these rights will not be watered down, but whether that holds true remains to be seen. 

We’re here to help

If you have any queries on holiday pay, including what should and shouldn’t be included, please contact Matt McDonald or another member of the employment team in your local office.

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