FAQs – Holiday Pay Calculation and Other Working Time Developments

Posted in : Supplementary Articles NI on 3 May 2016
Legal-Island
Legal-Island

At an event to consider holiday pay and other working time developments that Legal-Island held on 13 April 2016, delegates submitted a number of challenging questions to our speakers Helen O'Brien and Ciara Fulton. We have collated these questions, along with the answers from Helen and Ciara, into a couple of emails for our subscribers to consider.

If you have other questions on holiday pay and other working time issues, why not contact Helen O'Brien or Ciara Fulton for further advice.

Please note: some of these questions and answers are complex. This is a developing area of law and the following is not designed as a quick-fix or an authoritative statement of law. Please take professional advice (preferably from Ciara or Helen) before acting on any of the answers set out below.

The sections cover:

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EU v Domestic Laws

Q. Are domestic courts right - Are the UK courts and NI tribunals correct to disregard the provisions of the Working Time Regulations in relation to holiday pay calculation i.e. are they justified in reading into the existing domestic legislation words that allow them to apply CJEU decisions?

A. In our view, the UK Courts are not disregarding the provisions of the Working Time Regulations by reading words into domestic legislation to allow them to comply with CJEU decisions.

EU law has supremacy over National Law since the passing into law of the European Communities Act (1972).  Therefore, National Courts are obliged to interpret UK laws in accordance with EU law including decisions of the Court of Justice of the EU. How this is done by the Courts is the subject of complex rules of interpretation which, (among other things) permit the Courts to depart from a strict or literal application of the words of the legislation and to imply words necessary to comply with EU law. The only constraints on this obligation are that the meaning should “go with the grain of the legislation” and be “compatible with the underlying thrust of the legislation being construed”.

Thus, the EAT in Bear Scotland held that the Working Time Regulations (WTR) can (and should) be interpreted to conform with Article 7 of the Working Time Directive (WTD).  The EAT followed the approach in EBR Attridge Law v Coleman by reading words into the WTR to implement EU law.  The EAT rejected the argument that this was “contrary to the grain” of the domestic legislation.  The EAT in Lock followed this decision on the basis that it was not “manifestly wrong” and there were no other “exceptional circumstances” justifying departure from the general rule that the EAT will normally follow its earlier decision. 

It is understood that British Gas is appealing this point to the Court of Appeal, which will hopefully provide a definitive ruling as to whether the conforming interpretation was correct.

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Q. What to count - The CJEU decisions point to the fact that only the 4 weeks/20 days of annual leave under the Directive is protected for carry-over or replacing sickness with leave or vice versa. Is it best practice for employers to differentiate between holiday entitlement under the WTD, WT Regulations and contractual entitlement or is it simpler, but more expensive, for employers to lump all holidays together and apply the carry-over rules etc?

A. This is entirely a matter for individual employers. We are hearing of a number of employers who differentiate between the 4 weeks/20 days holidays for accrual and holiday pay calculations, and the remaining 1.6 weeks (8 days) and contractual settlement and others who find it simpler (albeit more expensive) to treat all holidays in the same way.  This will depend on the number of workers and potential costs of this approach versus putting in place holiday calculation systems which would allow you to differentiate.

The issue as to whether it is lawful to treat the different types of leave differently has been explored in a recent line of cases concerning sickness absence and holiday in both the CJEU and EAT including Dominguez v Centre Informatique du Centre Ouest Atlantique and Neidel v Stadt Frankfurt am Main in which the CJEU ruled that national laws could grant additional annual leave over and above the WTD’s four weeks and  limit access to it, for example, by denying it to workers on long-term sick leave.

These cases were applied by the EAT in Sood Enterprises Ltd v Healy, which held that the rule in Stringer that workers on long-term sick leave are entitled to carry leave over to the next leave year does not apply to the 1.6 weeks' additional holiday under Regulation 13A of the WTR (which is over and above the four weeks' holiday required by the WTD).

If you apply this reasoning to the calculation of holiday pay, EU law only requires that commission, overtime etc. is included in four weeks of the worker's annual leave entitlement. This analysis is in line with the EAT’s decision in Bear Scotland, in which the EAT accepted that the CJEU’s approach to calculating holiday pay should only apply to holiday under Regulation 13 of the WTR (the four weeks' leave).

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Q. Qualifying Leave – is qualifying leave the first 20 under EU law, the first 28 days under Working Time Regulations, or does it include additional contractual leave?

A. See above. When looking at accrued holiday during sickness due from previous years we can limit this to 20 days (if the employee works a five-day week).  When calculating holiday pay in the current year we can restrict additional pay i.e. overtime and commission to 20 days to which workers are entitled under the WTD also.  Any rules relating to any additional contractual holiday must be detailed in the contract.

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Carry-Over of Annual Leave

Q. Contractual wording - On a related point, should all contracts of employment specifically state which types of leave carry-over where an employee is sick and unable to take leave before the end of a leave year?

A. We would recommend that either the contract itself, or your holiday policy (which is referred to in the contract), clarifies what type of leave accrues and is carried over where an employee is sick and unable to take their annual leave before the end of the relevant leave year. However, because of the continually evolving nature of this area of employment law, many employers may decide to adopt a “wait and see” approach for now.

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Q. Refusing to accept requests for carry-over - On a related point, should an employer be in a position to refuse to allow leave to carry-over where an employee has not been sick for the whole year and could have taken leave but didn’t get around to it?

A. This is an interesting question and the answer may well depend on when the leave accrued and when the employee became ill. Thus, for example, if an employee falls ill one month before the end of the leave year and still had 15 days leave left to use, could it be argued that he should have used this leave in the first 11 months of the leave year and therefore is not entitled to carry forward the leave?

However, given the number of decisions which focus on the fact that an employee does not need to request leave to carry it over, or even be able to take leave, as well as the consistent reminders in the case law that it is for the employer to decide when annual leave is taken, our view would be that it is unlikely that this argument would be successful.   It is also worth pointing out that it is possible to argue that any leave accrued and used by the employee before they go out sick should arguably be apportioned towards the 4 weeks/20 days leave that could be carried forward.

Thus, for instance, if the employee in this example was entitled to 30 days' holiday in the leave year, he will already have used 15 of his basic WTD entitlement. Therefore, he will only be entitled to accrue and carry forward a further 5 days. The remaining 10 days being additional leave to which the WTD does not apply (see above).

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Q.  I was particularly interested in the discussion around the 18 month carry over in cases of sickness absence.  I have been asked to look into a request from an employee who was off on long term sick from June 2013 until March 2015, and I would welcome any input you might have on how to deal with a query over her unused leave from 2013.

-        Our leave year runs from January to December.

-        Due to her length of service, the employee’s annual leave entitlement is 30 days, plus 12 days paid leave on public & bank holidays each year.  (She had also carried 5 days allowance into 2013 from 2012 under our normal annual leave rules – there was no sickness issue involved in this).  She started the year with 30 days annual leave allowance for that year, plus 5 carried in from 2012, plus her public holiday entitlement.

-        In this case, the employee went off sick in June 2013, having taken 2.5 days annual leave and having benefitted from 6 public holidays.  She therefore had 32.5 days leave remaining in 2013.

-        In cases of long-term sickness, our policy permits carry-over of the statutory minimum 28 days to the following leave year, minus any leave the employee has benefited from during the year (including public holidays).  If she had returned during 2014, we would have permitted her to carry 19.5 days into the following year (i.e. 28 minus 2.5 annual leave days taken, minus 6 public holidays benefitted from). 

-        She was off throughout 2014 and returned in March 2015.  The HR team dealing with her absence permitted her to carry the maximum of 28 days allowed under our policy from 2014 into 2015.  She therefore had 58 days annual leave to use (30 for 2015, plus 28 carried from 2014) plus 10 public holidays remaining that year (having already missed New Year’s day and St Patrick’s day).

-        She used 53 of these days during 2015, and carried the remaining 5 days into 2016, in line with our normal procedures.

-        In April 2015 The employee emailed the HR Manager who had been dealing with her absence and asked: “Can you please explain to me how leave for 2013 is simply forfeited in light of the ruling in Stringer v HMRC?”

-        She has not yet got an answer and has been passed between different teams in search of a definitive reply – her Trade Union representative has intermittently reminded us about and pushed for an answer on in the year since the query was initially raised.  I have recently ‘inherited’ this query.

-         Her TU rep is requesting payment for the outstanding unused leave from 2013.  My understanding is that we cannot ‘buy out’ someone’s annual leave allowance, and if she is due anything in relation to leave from 2013, it should be actual days leave that are credited to her balance, and not payment in lieu of these days.  

-        My initial thinking had been in relation to the 15 month period applied in the Schulte ruling, until I came across the Plumb case.  My reading of the 18 month rule would have been that (although some time has now passed since she raised the query), she requested the leave within 18 months of the end of the relevant leave year (April 2015 being 16 months from the end of our 2013 leave year) and it would potentially be in scope for her to claim that she should have the opportunity to make use of these days. 

-        As it stands, she only used 9 days annual leave during her first 3 months back in work (that is, up to June 2015, the point where 18 months had elapsed since the end of the 2013 leave year).  Should 18 months be treated as the cut-off for making use of any accrued leave, or simply for claiming it (and having the opportunity to add it to a leave balance for that year and use it throughout the remainder of the year?  I appreciate that this is complicated by the delay in the employee receiving an answer, and she may claim that she would have used more leave during that timeframe if she had been advised that she had more leave to carry.

Carrying on this theme, Sick employees don’t have to request annual leave to be carried over to the next leave year. But if they don’t ask during the year, will they lose it after 18 months? There is some argument over which months accrue annual leave on termination or request from employees.

Please explain using worked out examples.

A.  We need a long and reasoned answer to this long and reasoned question. In Plumb v Duncan Print Group the EAT held that the right to carry over annual leave which accrues whilst on sick leave is not unlimited. Having regard to the ECJ's decision in KHS AG v Schulte, it held that Regulation 13(9) of the WTR need only be read as permitting a worker to take annual leave within 18 months of the end of the leave year in which it accrued where he or she was unable or unwilling to take annual leave because of sickness.

The EAT suggested the following alteration to the words inserted in Regulation 13(9) by the Court of Appeal in Larner in order to ensure regulation 13(9) is interpreted in accordance with the WTD (shown in bold below):

"Leave to which a worker is entitled under this regulation may be taken in instalments but - (a) it may only be taken in the leave year in respect of which it is due, save that it may be taken within 18 months of the end of that year where the worker was unable or unwilling to take it because he was on sick leave and as a consequence did not exercise his right to annual leave."

As the specific wording inserted into the WTR by the EAT in Plumb is that the leave may be taken within 18 months of the end of the leave year, this means that, where an employee goes on sick leave part way through the leave year, they will be entitled to carry forward any WTD annual leave that accrued during that leave year, for up to 18 months from the end of the leave year. This would not be limited to annual leave accrued during the twelve months prior to the 18 month carry over period.   

So, in relation to this specific example, I believe the employee is entitled to carry forward 11.5 days from 2013 (her accrued but unused WTD leave) (plus 20 days in 2014).

Her right to carry over her greater entitlement under the policy is not affected by the recent decisions. Therefore, they may impose such limitations on carry over as they see fit so long as they comply with the statutory minimum requirements. As she was allowed to carry over more than her statutory entitlement, these have been satisfied. Also, she would have lost any leave carried over from 2013 in 2014 because the policy only permits carry over to the following leave year (so it was lost by the end of 2014?)

In any event, her claim is out of time as the leave should have been taken within 18 months of the end of the leave year in which it was due.

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Contractual Payments – What is Included in Holiday Pay?

Q. Irregular payments - How does the law apply to intermittent payments e.g. where an employee has a contractual requirement to work overtime but rarely does? Should they be treated as having hours that do not vary and therefore just be paid normal weekly/daily pay when on holiday or is the fact that they COULD be required to work O/T be enough to change the contract into one that varies with hours worked and therefore require the employer to make a calculation on each occasion, notwithstanding that most 12 week periods will include no O/T or other occasional payments?

A. I am slightly unclear as to whether this question relates to guaranteed overtime (overtime which an employer is obliged to offer and an employee is obliged to accept) or non-guaranteed overtime (overtime which an employer is not obliged to offer but which an employee is contractually obliged to work, if offered).

Assuming we are talking about the latter, then following the EAT's decision in Bear Scotland, it is clear that "non-guaranteed" overtime should be included in calculating pay for the first 4 weeks’ leave, as it is required by the employer. Therefore, it is intrinsically or directly linked to a worker's work.  Clearly, if no overtime is offered or worked, then the calculation would not be required as no additional remuneration will have been paid.

However, if the overtime worked is truly of a one-off or irregular/uncommon nature it may be possible to argue that the “normal” hours do not change and that the overtime is not a sufficiently permanent feature of remuneration to justify treating it as “normal remuneration”.  According to the EAT in Bear Scotland, in order to be included in the calculation of holiday pay, workers need to show that payment has been made for a sufficient period of time to justify the label "normal remuneration". This would suggest that isolated occasions of working overtime do not count. However, in the absence of guidance about what is a "sufficient period", this would need to be decided on a case-by-case basis.

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Q. Commonplace overtime working - In a similar vein, will someone who regularly works overtime be entitled to average pay, whether or not it is a contractual requirement to undertake O/T?

A. Assuming this question relates to voluntary overtime (overtime which an employer is not obliged to offer and the employee is not obliged to work), the answer is somewhat less clear as it was not dealt with in Bear Scotland. However, it is possible that Tribunals will determine that voluntary overtime forms part of a worker’s “normal remuneration” if a settled pattern has developed over a sufficient period of time to justify this.

This was the conclusion of the employment judge in the GB tribunal case of Neal v Freightliner, where the worker was not contractually obliged to work overtime but the employment judge indicated that the fact that Mr Neal might have volunteered to perform tasks outside his contractual hours did not mean that his performance was no longer "intrinsically linked" for the purposes of the "normal remuneration" test.

Also, the Tribunal at first instance in Bear Scotland found that the fact that, in theory, workers could refuse overtime did not mean that the pay was any less intrinsically linked to the performance of the tasks set out in the contracts and therefore should be included in the calculation of statutory holiday pay. Unfortunately, on appeal the EAT did not comment on this finding but appeared to accept that compulsion is not necessary for there to be an "intrinsic link".

Finally, in Patterson v Castlereagh Borough Council, the Northern Ireland Court of Appeal held that there is no reason, in principle, why voluntary overtime should not be included in the calculation of statutory annual leave. It will be a question of fact for the Tribunal whether voluntary overtime should count as normal remuneration in a particular case.

Therefore, in our view future cases on the inclusion of voluntary overtime in holiday pay are inevitable, especially as voluntary overtime is much more common in many sectors than compulsory or non-guaranteed overtime.

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Q. Collective bonus payments - It seems clear that individual bonuses, paid regularly, should be included in average holiday pay, at least for the first four weeks of annual leave in any one leave year. Should collectively applied bonuses be added into the calculation for annual leave pay?

A. The question of “team bonuses” arose in Wood v Hertel (UK) Ltd where the employees were entitled to an incentive bonus arrangement which consisted of:

- A fixed element relating to hours worked (but which could be removed for excessive absence, failure to work all agreed shifts in full, or resigning without proper notice); and

- A performance-based element, paid if the employees reached agreed targets, and provided that they had not taken part in any unofficial or unauthorised  industrial action.

In that case the Tribunal rejected as “all but hopeless” the employer’s argument that these bonuses were not part of normal pay and were not intrinsically linked to the performance of tasks the workers were required to perform under the contract.  The Tribunal also commented that the test is whether the payment is “intrinsically linked” to performance of tasks by the worker under their contract, not whether it is “exclusively” linked.  Therefore, a bonus that depends on team, rather than individual, performance is potentially within scope. This finding was not challenged on appeal.

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Q. One-off payments - On a related point, should one-off annual bonuses be included in average pay? Can once-yearly payments legitimately be described as ‘normal’ or a disincentive to take leave? Does this not allow employees to maximise earnings by planning leave to take place within 12 weeks of being paid a bonus?

A. Bonuses are potentially one of greyest areas remaining for future litigation.  On the one hand, bonuses are generally intrinsically linked to performance of some element of the worker’s contract.  On the other, it is difficult to say with certainty that an annual discretionary bonus is within the scope of “normal remuneration”. If an annual bonus is to be included, it raises up the additional problem that anything shorter than 12-month reference period will not be sufficiently representative and cannot be relied on.

Some commentators take the view that, provided the bonus received is unaffected by the taking of holiday, the worker will already have received the relevant bonus payment in respect of the period of holiday and should not be entitled to anything additional.  However, if bonuses (especially discretionary bonuses) are linked to performance it is certainly arguable that a worker who takes less holiday may perform better over the year and achieve a higher bonus, thus creating a disincentive to taking holidays, similar to that identified by the CJEU in Lock.

However, where a bonus is based solely on company performance, there is a strong argument that, provided there is no financial disincentive to taking holiday, the principles set out by the ECJ in Lock are not engaged.

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Q. Definition – how do you define a regular overtime payment?

A.  I presume here that you are referring to voluntary overtime – This is still quite a grey area as there is no statutory definition. According to the EAT in Bear Scotland, in order to be included in the calculation of holiday pay, workers need to show that payment has been made for a sufficient period of time to justify the label "normal remuneration". This would suggest that isolated or irregular occasions of working overtime do not count.

In discussing Exercise 1 delegates felt that that the fact that there were 4 weeks when overtime was completed throughout the 12 weeks was sufficiently regular to be included. Unfortunately, the phrase 'all cases must be decided on their own merits' springs to mind and isn't particularly helpful but it will remain the case until we see definitive court decisions or a legislative provision is created.

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Q. Eligibility – would you have to satisfy certain requirements to be eligible e.g. is it only paid where overtime was worked in the branch / is it only paid if you would have been asked to work had you been available?

A.  Case law differentiates between three types of overtime:

-          Guaranteed / Compulsory overtime – where the employer is obliged to provide overtime and the employee is obliged to work overtime or be paid in lieu, if it is not provided;

-          Non-guaranteed overtime – where the employer is not obliged to provide overtime (or pay in lieu) but the employee is required to work overtime if requested;

-          Voluntary overtime, where an employer does not have to provide overtime and the employee does not have to work overtime, if requested.

Guaranteed / compulsory overtime is treated as "normal working hours" for the purpose of the calculation of holiday pay under the ERO 1996.

Following the EAT's decision in Bear Scotland, it is clear that "non-guaranteed" overtime should also be included in the calculation of pay for leave taken under the WTD.

The situation with regard to voluntary overtime is less clear as we have no case law which deals definitely with voluntary overtime. However, we do have strong indications from the employment tribunals in Neal v Freightliner and in Bear Scotland that the fact that overtime might have been voluntary or could in theory refuse overtime, did not mean that it was any less "intrinsically linked" to the performance of his contractual duties.

We also have an indication from the Northern Ireland Court of Appeal’s in Patterson v Castlereagh Borough Council, that there is no reason, in principle, why voluntary overtime should not be included in the calculation of statutory annual leave. Therefore, my best guess is that the courts will find that average overtime must be included in holiday pay calculations where any kind of overtime is regularly worked and essentially becomes part of an employee's regular take home pay: if an employee's wages drop when they go on holiday it is likely to be a disincentive to taking holidays and such disincentives are unlawful under EU law.

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Q. Exceptions – Would holiday pay be payable in the following scenarios: a member of staff works on a project and following the end date takes a period of leave before joining a new branch (even if new branch does not have overtime budget / if the budget for overtime is reduced or there is a moratorium) do staff still get paid on previous pattern of work /  a member of staff works every Sunday for 6 months, takes three days off mid-week the following month and chooses not to work any Sunday in that month

A. If an employee's remuneration for employment in normal working hours (whether by the hour or week or other period) does not vary with the amount of work done in the period, the amount of a week's pay is the amount which is payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week (see article 17 of The Employment Rights (Northern Ireland) Order 1996). So, you shouldn't have to worry about employees who generally work standard our each month or week and get the same pay each week or month, as appropriate.

The problems arise when either hours and/or pay varies from pay period to pay period. In those circumstances, and in light of the recent CJEU and EAT decisions, employees are entitled to be paid holiday pay based on an average pay (including the overtime) they did in the previous 12 weeks (see below). The overtime budget of the new branch or any moratorium on overtime in the new branch would not be relevant to the calculation of holiday pay which takes into account work done (including overtime) in the previous branch.

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Q. Minimum Payment – should payment be made irrespective of the amount or is there a de minimis level?

A. Payment should be made irrespective of the amount.

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Q. Pensionability – if you pay a basic rate of overtime with a pensionable element, do these need to be broken down identically for holiday pay or can a single non-pensionable money amount be paid?

A.  I’m not really sure I understand the question but  - holiday pay is based on gross pay.

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Q. Overtime Hours - An employee is paid overtime after 39 hours.  In this particular week the employee works as follows:

Monday – worked 8 hours; Tuesday – worked 8.5 hours; Wednesday – holiday –normal day 8 hours; Thursday – holiday – normal day 8 hours; Friday - holiday - normal day 8 hours

Total hours worked – 16.5

Total holiday hours – normal day 24 but the holiday average when calculated is 9 hours per day = 27

Total hours = 43.5

Do we pay the holiday hours at the average holiday rate?  What about the fact the employee has worked over 39 hours?  How do we manage the extra 4.5 hours?

A. You should pay this employee an average of his/her weekly pay over the 12 weeks previous to the week in which s/he took holiday, pro-rated to 3 days.  What s/he worked in the holiday week is of no concern to the calculation of average pay for that holiday - it's the 12 weeks previous that count.

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Q. Let’s assume a member of staff works overtime on a voluntary basis but it is frequent enough to be determined as regular. They have worked every Saturday and Sunday in the preceding 12 weeks. In week 13, they take annual leave from Tuesday to Thursday. There is no overtime offered in week 13 / overtime is offered and they turn it down.

Does this member of staff still receive a payment as their salary is lower in the week they have taken leave? Could you rely on the fact there was no overtime offered so they have suffered no loss compared to staff who did not take leave in week 13 / they chose not to complete the overtime and this had no impact upon their availing of a period of leave and therefore they are responsible for only receiving their basic pay in week 13.

A . I have some concerns about someone working what appears to be a 7-day week! But, assuming they don't normally work five days and all weekend, the principle is the same - it seems to be common enough to be regular and it is likely that the courts will view this as a contract with variable hours, so an average pay should be calculated for holidays. This employee should probably receive holiday pay based on his average pay over the last 12 weeks (keeping in mind that the courts have not ruled on voluntary overtime).  What overtime he might have done in week 13, had he been at work, is not relevant to this particular calculation but might be if s/he takes a holiday in the next 3 months (and hasn't taken 20 days' holiday in that annual leave year).

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Reference Periods

Q. Reference Period – is the reference period the previous 12 weeks, or for monthly paid staff / for those who work seasonal overtime does it need to be the previous 12 months?

A.  The ERO uses a 12 week reference period to calculate a week’s pay. The CJEU in Lock and Williamssaid that the reference period must be a “representative normal period”. The Advocate General in Lock suggested 12 months. The CJEU did not comment on this, but held that holiday pay must correspond to the worker's "normal remuneration" and it is for the National Court to work that out by taking an average over a reference period that is "considered to be representative".

In Bear Scotland the EAT simply stated that where there is no normal remuneration, an average taken over a reference period determined by the Member State is appropriate. It did not say whether the 12-week reference period in the ERA met this test. However, the EAT did not overturn the Tribunal's finding in this regard. Therefore, this may be that this can be inferred from the judgment.

In the absence of further guidance from the CJEU, Tribunals will have to approach this question on a case-by-case basis and may decide that it may be more appropriate to use a longer reference period in some circumstances where the reference does not truly reflect the normal working pattern. 

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Q. If a member of staff is on maternity leave or a career break and takes annual leave immediately before their return, does the reference period need to be adjusted? If they have taken leave in the previous 12 weeks, do those weeks need to be excluded to prevent a lower average payment being made?

A. The general rule is you count any weeks in which an employee was paid (including SSP) and exclude weeks in which no pay was received, so you get an average from the last 12 weeks in which wages were received by employees, so holiday weeks during the previous 12-week reference would be included.

Reference periods should not include family friendly leave or extended leave, career breaks etc.

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Q. Calculation – how is holiday pay calculated? If someone worked on 8 occasions totalling 48 hours during the 12 week period, their average attendance is 6 hours. Do they get 6 hours overtime for every day’s leave taken?

A. Assuming you are dealing with non-guaranteed overtime, you should calculate the employee’s holiday pay as an average of his/her weekly pay over the 12 weeks previous to the week in which s/he took holiday. 

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Equality Issues and Other Statutory Rights

Q. Unfair discrimination – if the majority of staff receiving payment are full time males who are getting paid extra for not being in work during holidays, is there the possibility of unfair discrimination against part time females who are unable to work overtime due to caring responsibilities?

A. It is possible that this could be argued. However, the employee would have to be in a position to prove that the difference in holiday pay was a provision criterion or practice which affected considerably more women than men and could not be justified. Also the Part Time Workers (Prevention of Less Favorable Treatment) Regulations (Northern Ireland) 2002 provide that it is not less favorable treatment on grounds of part time status to require a part time worker to work the same number of hours to a full time comparator in order to qualify for overtime premia. Part time staff working regular additional hours would still be entitled to a higher average payment for their holidays, albeit probably without the higher rates for, say, working +39 hours applying.

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Q. NMW - If the average hourly rate falls below the NMW should we be making the rate up? 

A. Yes you should. Again, it is average pay over the appropriate reference period. Not every hour has to attract at least the NMW - the average pay may not fall below it.

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Q. Average Pay - If an employee’s average hours worked falls below their contracted hours e.g. 39 per week should we be making the hours up to 39?

A. This depends on the terms of the contract of employment. If the contract specifically states that an employee will be required to work 39 hours per week at a specific rate of pay, then failure to provide the employee with those hours would amount to an unlawful deduction from wages or breach of contract. If, in turn, the leads to an underpayment of holiday pay (because holiday pay reflects the weeks in which the employee did not work 39 hours), then this too would potentially be an unlawful deduction from wages or breach of contract

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Q. Asking for holiday pay in advance – an employee is on 3 weeks' leave and rather than be paid up every Friday as normal, the employee has asked for the 3 weeks' holiday pay in advance.  How do we handle this?  If the employee is paid every Friday, we simply do the holiday pay calculation on a week by week basis.  However, if the employee asks to be paid in advance do we pay the employee the same rate for all 3 weeks?

A. We recommend that you calculate the holiday pay for the whole period based on the 12 weeks previous to the beginning of the holiday.

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Q. Maternity/Paternity Offset - If an employee is sick or on maternity/paternity and they decide they want to book holidays, how should we calculate their pay?  Do we disregard the weeks the employee was on SMP/SSP and replace them with a week the employee worked?  They may not have any actual worked earnings in the previous 12 weeks.

A.  Reference periods should not include family friendly leave.  You may decide to take a cautious approach and disregard extended sick leave also.

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Q. Sick Days - Do we include sick days in the average calculations? What do we do if an employee has not worked a full week for calculation purposes (i.e. had 3 days sick leave and 2 days normal working days)?  Do we take the hours based on 2 days in the week OR all 5 days OR discount the week and use another week? Do we include holiday days in the average calculations?

A. As a general rule you may include any weeks where employees were paid SSP - however as we said at the seminar we are cautious in this regard and are concerned that the issue of the inclusion of SSP may be challenged.  In addition, I have mentioned above that you may decide to take a cautious approach and at least disregard extended sick leave.

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Q. My understanding is that average holiday pay is based on worked hours. In the case of including SSP within the calculation, we know the value of the SSP but how do we allocate a number of hours to the day/week? Do we use the contracted daily hours or do we not allocate any hours to this at all?

A.   Holiday pay is based on average pay.  You calculate their average pay over the 12 weeks and divide it by their contractual hours. It will, in some cases, mean that holiday pay will fall below average pay in periods where no sickness has occurred in the reference period. That's one of the reasons we recommended caution. It seems harsh, even if it's lawful, and won't do much for morale.

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Q. Is it possible to fix times when employees must take holidays for certain employees and not others who are employed by the same company?

A.  I am not sure if you mean fix times for individual holidays or fix holiday shut down times. It will depend on your business needs – for example it would be quite acceptable to fix holiday times for production workers to ensure you had adequate cover at all times but you may not need to be so prescriptive with the administration staff. 

However if you have 2 employees doing the same role it wouldn’t be advisable to fix one person’s holidays but let the other have holidays when they choose.  The exception to this would be if one employee does not book holidays, then it is advisable to speak to them and ask them to book holidays and if they do not do so you should allocate holiday times.

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Q. Maternity rights and annual leave -Please explain the difference in rules in relation to carry-over and accrual of leave when employees are on maternity or other types of family-friendly leave.

A. A woman's contractual terms (other than those relating to remuneration) continue during both Ordinary Maternity leave and Additional Maternity Leave. Therefore, women maternity leave continue to accrue their 5.6 weeks’ statutory annual leave under the WTR as well as any additional contractual leave during both OML and AML (not just their 4 weeks WTD annual leave).

In Merino-Gomez, the ECJ has held that it would amount to sex discrimination if a woman was to lose her entitlement to statutory annual leave as a result of going on maternity leave. Therefore, women must be able to take the paid holiday to which they are entitled during a period other than their maternity leave, including if necessary in the next leave year.

Similar principles would apply to other types of protected leave.

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Q.Salary Sacrifice - How do salary sacrifice schemes work in relation to these calculations? Should employers use the full salary or the net after pay has been reduced to, say, grant extra leave or some other benefit?

A. The calculations should be based on gross pay, with the appropriate salary sacrifice element of the holiday pay deducted from the holiday pay as normal.

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Miscellaneous Issues

Q. Extra Leave - An employee currently works on average a 42 hour week and is paid for this via his holiday pay.  He has asked if he can only get paid holiday pay for 40 hours and then accumulate the additional 2 hours for lieu time so that he can build them up and receive extra holidays.  Is this something we are allowed to do within the Company?

A. In our view, there is nothing to prevent you agreeing to give time of in lieu of overtime worked. However, you should be mindful of setting a precedent for other employees and establishing clear rules regarding when time in lieu is accumulated and when it may be taken etc.

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Q. Holidays during maternity leave - I noticed in the programme that holiday pay during illness is covered but not holiday pay during maternity leave.  I was wondering if there would be the opportunity to address this issue during the event.

A. If you are calculating holiday pay by reference to the 12 week average pay and this includes a period when the employee is on ordinary or additional maternity leave, parental leave, paternity leave or adoption leave, or shared parental leave, these weeks are disregarded, and earlier weeks are brought in so that the calculation is done on the basis of their normal remuneration.

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Q. Back Pay – is the usual three/six month time limit for claims sufficient to prevent large claims for back pay? Or is there a longer period for holiday pay claims?

A. Under the unlawful deduction provisions of ERO, claims for a "series of deductions" must generally be brought in a Tribunal within three months of the last in the series.

There is no limitation as to how far back such claims can go. However, in Bear Scotland, the EAT pointed out that employers can determine which type of leave (the 4 weeks WTD holiday or 1.6 weeks WTR holiday) an employee has taken. They can also determine that the four weeks holiday is taken first, with the "additional" leave being the last during the holiday year.

Because the recent decisions do not apply to this “additional” leave, it may still be calculated in accordance with the week's pay provisions of ERO. Therefore, if it has not been underpaid, the series of deductions will have been broken each holiday year if there has been a period of at least three months between periods of under payments.

This matter was considered further by the Employment Tribunal in August 2015 when Bear Scotland returned to the Employment Tribunal which found that the majority of the claims were out of time, as for the most part, the series of deductions had been broken because the underpayments had been interspersed with periods of three months when no deductions occurred.  We understand that the claimants have sought permission to appeal.

In GB, the Deduction from Wages (Limitation) Regulations 2014 introduced a two-year limitation period for unlawful deductions from wages claims presented on or after 1 July 2015. NB. These Regulations do not apply to Northern Ireland.

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Q. Change in hours – if someone changes their hours of work mid-month, their salary will be lower in relation to basic pay, and they would have had to work more hours before overtime was payable. How would this affect holiday pay?

A. Similarly, assuming you are dealing with an employee who does not have normal working hours and works non-guaranteed overtime, you should calculate the employee’s holiday pay as an average of his/her weekly pay over the 12 weeks previous to the week in which s/he took holiday. 

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Legal-Island would like to thank Helen O'Brien, Personnel & Training Services and Ciara Fulton, Partner, DWF, for the answers to the above questions.

DISCLAIMER: The information in this document is provided as part of Legal-Island's Update on Holiday Pay and Other Working Time Developments that we held on 13 April 2016 in association with C&H Jefferson and Croner Consulting. We recommend that professional advice is obtained before relying on information supplied anywhere within this document.

This article is correct at 03/05/2016
Disclaimer:

The information in this article is provided as part of Legal-Island's Employment Law Hub. We regret we are not able to respond to requests for specific legal or HR queries and recommend that professional advice is obtained before relying on information supplied anywhere within this article.

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