Calculating Holiday Pay

Recent Court of Justice of the European Union (CJEU) rulings plus an Employment Tribunal first decision has thrust the issue of what a week’s pay should comprise into the spotlight.

Holiday Pay: Current Law

The law governing holiday pay is contained within the Working Time Regulations (Northern Ireland) 1998 (WTR) and the Employment Rights (Northern Ireland) Order 1996 (ERA). A week’s pay is the contractual remuneration due to an employee for working their normal working hours in a week; however special rules apply to employees who do not have a normal working week.

• Employments with no normal working hours

If an employee doesn’t work normal hours, then the method for determining a week’s pay is to calculate a 12-week average. This will include basic pay and variable payments such as bonuses and commission.

• Employments with normal working hours and no additional payments

Where employees have normal working hours and whose pay does not vary according to the amount done, or on a weekly basis; a week’s pay is the amount payable by the employer under the contract in force if the employee works throughout their normal working hours in a week.

• Employments with normal working hours and additional payments

Difficulty arises when an employee with normal working hours receives additional payments on top of their normal pay. In these cases a week’s pay is more difficult to determine. The following principles apply to calculating those employees whose hours and pay do not vary:

Overtime

A contract still has ‘normal working hours’ if the employee is entitled to paid overtime when they work more than a fixed number of hours in a week. In this situation ‘normal working hours’ is that fixed number of hours. In the case of Sanderson and another v Exel Management Services Limited, a fixed number of hours was held to mean an actual set number of hours worked. However, the recent first instance tribunal decision in Neal v Freightliner Limited held that holiday pay must include non-guaranteed overtime in addition to basic pay regardless of whether the overtime was compulsory or voluntary and even where the employee has ‘normal working hours’. This ruling is in direct conflict with the ERA and was decided on the basis that current domestic legislation does not adequately implement European law.

Commission payments

The very recent CJEU decision in Lock v British Gas Trading Limited also directly conflicts with previous well-established approach to commission payments. It held that for employees with normal working hours commission payments which are intrinsically linked to the performance of a task should be taken into account when determining a week’s pay for holiday purposes. This is so that employees are not deterred from taking leave. At present, as this is a European decision it is only directly binding on public and quasi-public sector employees. For private sector employees it remains that employees who work normal hours are not entitled to holiday pay that includes commission payments.

Performance-related bonuses

In the case of May Gurney Limted v Adshead, it was decided that where an employee has normal working hours and entitled to a performance-related bonus, pay is to be regarded as varying ‘with the amount of work done’. Since the bonus varied with the amount of work done, the employees’ statutory holiday pay for a week should be calculated by averaging out their pay over a 12-week period.

Attendance allowances

The May Gurney Limited v Adshead case also found that the amount of a normal week’s pay is the amount of pay that a worker would receive after completing a week’s work. Since an attendance allowance would be part of that pay, it should be included in the worker’s statutory holiday pay.

Holiday Pay: Future State

It is no doubt that the Lock v British Gas Trading Limited judgement will eventually apply to all employees. The government are likely to amend domestic legislation within the Working Time Regulations and/or the Employment Rights Act so that the legislation is in line with the judgment.

We also expect that either superior courts or parliament will eventually clarify the period of time that should be used for the purposes of calculating the commission element of holiday pay.

What Should Employers be Doing?

If you are a public or quasi-public sector employer you will need to comply now with the judgement of the Lock case. For private sector employers domestic law does not state that commission needs to be included for the purposes of calculating holiday pay.

However, the law is not settled in this area and could change. There are four different options employers could choose to take at the moment:

• Ignore the issue until it is fully clarified by the domestic courts and/or legislation.
• Change your policy to incorporate the payment of holiday pay which includes commission payments moving forward and negotiate with employees or unions regarding back pay.
• Change your policy to incorporate the payment of holiday pay which includes commission payments moving forward, but do not communicate this widely so that eventually claims for back pay will become time-barred.
• Be upfront with employees and unions, explain the current circumstances and negotiate an arrangement to resolve issues of the position moving forward and back pay.

If you are unsure what is best for your business seek professional opinion.