Are you paying your workers the right amount of holiday pay?
A recent ruling by an Employment Appeal Tribunal is set to cause many businesses a headache. Quite an expensive headache, at that.
Simply put, it means that certain businesses will find themselves paying their workers additional holiday pay. Moreover, if they’re not already paying that additional holiday pay right now, they’re leaving themselves open to claims for back pay—claims that will almost certainly be valid.
Worse, while the broad thrust of the Employment Appeal Tribunal ruling is clear, there are still troubling ambiguities in how best to comply with the ruling. At minimum, what used to be a very straightforward calculation now looks set to become much more complicated affair, and require businesses to maintain additional records.
What’s it all about? Let’s take a look.
The starting point is the European Union’s Working Time Directive, which entitles workers to a minimum of four weeks’ paid holiday a year.
The Directive is enshrined in UK law under the Working Time Regulations, which are a little more generous: UK workers who work five days a week have the minimum European entitlement of four weeks of paid holiday, plus an additional 1.6 weeks' paid holiday each year which represents the eight bank holidays we usually have in the UK each year —a total of 5.6 weeks, or 28 days.
And the Directive is quite explicit: when on holiday, workers should receive their normal pay.
Employment Appeal Tribunal case law
But what, exactly, is ‘normal’? For years, the presumption has been that ‘normal’ means basic pay—that is, payment before any overtime, or commission.
Because, after all, when workers are on holiday, they aren’t earning any commission, and they aren’t working any overtime.
But a series of recent Employment Appeal Tribunal rulings has thrown that cosy assumption into disarray. Simply put, the upshot of cases such as Bear Scotland vs. Fulton, Hertel vs. Woods, and Amec vs. Law is that these overtime and commission payments are part of normal pay, at least in certain circumstances.
That’s right: if you have workers who are regularly paid overtime or commission, then those overtime and commission payments should be regarded as part of their normal pay. And so should be reflected in their holiday pay.
So what does all this mean for businesses?
At its simplest, if you have workers who are being paid regular overtime and commission payments, then it’s important to start reflecting those payments in their holiday pay.
For each worker, an average level of overtime must be calculated, and an average level of commission, and holiday pay calculated so as to include these average payments.
There’s nothing to be gained by deferring this, because payments can be backdated—although, from July 1st 2015, only as far back as two years.
So far, so simple. Or at least, understandable. But the devil, as always, is in the detail.
For instance, what is actually meant by ‘overtime’? The Employment Appeal Tribunal identified three different kinds of overtime, some of which falls within the ruling, some of which doesn’t. The key determinant is how regular the overtime and commission payments are.
Basically, if the worker regularly works overtime, and has a regular expectation of receiving overtime or commission payments, then the ruling affects them.
But when calculating the average level of overtime and commission payments, over what period should the average be worked out?
The Employment Appeal Tribunal didn’t say—although elsewhere, in another context, the Working Time Directive talks about a 12-week reference period. So using that 12-week period would at least be consistent.
Likewise, it’s important to remember that the case law we’re talking about is in relation to European law—that is, the Working Time Directive, and its four-week holiday entitlement.
Put another way, the Employment Appeal Tribunal has specified how holiday pay should be calculated for those four weeks stipulated by the Directive. But it has said nothing about the additional eight days—or 1.6 weeks—for which full time British workers also receive holiday pay.
So in theory, that 1.6 weeks of paid holiday could be paid on the ‘old’ basis—that is, without reflecting overtime and commission payments.
What to make of it all?
It is, in short, all a little unclear. And for many employers, that lack of clarity will be troubling, as it leaves them open to the prospect of aggrieved workers making backdated claims for unpaid holiday pay.
Our view, at The Legal Director, is that this lack of clarity will only be resolved by future case law. Meaning that for the foreseeable future, employers must simply live with the present ambiguity.
That said, they’ll naturally want to minimise the risks that they face.
Here at The Legal Director, we specialise in providing clear cut legal advice in business friendly language. Providing it affordably, to suit a business’s own needs and workloads. And providing it in a range of offerings stretching from a fixed fee monthly retainer for telephone advice, to your own part time legal director, working alongside your own board of directors.
To find out more get in touch or call James Mallender at any time on 07968 089 971.
Posted Wednesday, July 15th, 2015 by Warren RylandTweet
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