Holiday pay is a hot issue
A case concerning voluntary overtime and a change to the employment rights regulations combine to give payroll professionals a headache when calculating holiday pay.
What is a week’s pay?
The Working Time Regulations (SI 1998/1833) give workers the right to a minimum of 5.6 weeks’ paid annual holiday, and this holiday pay is calculated based on two distinct elements:
- regulation 13 provides for four weeks annual leave; and
- regulation 13A for the additional 1.6 weeks UK holiday.
However, the definition of “week’s pay” can be different for these two portions of holiday pay.
Pay for the first four weeks reflects a series of cases decided both in the UK domestic courts and in the European Court of Justice. But pay for the remaining 1.6 weeks is calculated as determined by the worker’s (ie not just employees) contract of employment.
Until 2012, employers had taken the view that salaried staff had normal working hours and fixed pay, therefore only their basic pay needed to be paid while they were on holiday. Many employers had historically not even recorded when salaried staff were on holiday as no adjustment to pay was needed. Their basic pay was simply paid as normal during holiday periods.
The case British Airways plc v Williams & Ors  UKSC 43 determined for the first time that other pay elements that were “intrinsically linked to the performance of the duties” had to be included in holiday pay. This ensured that the employee was not financially worse off whilst on holiday, which could act as a disincentive to take annual leave, so defeating the purpose of the EU Working Time Directive which is primarily a health and safety measure.
Since 2012, the UK courts have decided that all of the following must also be considered as “normal remuneration”: commission, attendance and productivity bonuses, travel-time allowances, payments related to professional or personal status (eg long service), guaranteed/contractual overtime, overtime that must be worked if requested by the employer, and even voluntary overtime.
Bringing us back to the present day, the case of East of England Ambulance Service NHS Trust v Flowers and Ors  EWCA Civ 947 centred on the definition of voluntary overtime. It considered whether this should be included within the definition of “normal remuneration” in the EU Working Time Directive (2003/88/EC) and the 1998 Working Time Regulations (2016 regulations in Northern Ireland).
This is the first time a holiday pay case has reached the Court of Appeal, but such were the financial implications for the NHS, the Ambulance Trust felt it was important to seek clarity.
The trust’s appeal was based on a distinction between different types of voluntary overtime: shift overruns and additional voluntary shifts.
The employer accepted that shift overruns (where the paramedics had to continue working if they were involved in an emergency call at the end of their shift) should be included in the calculation of holiday pay, but did not agree that where they had taken on additional shifts these should also be included.
The Court of Appeal was asked to consider both the paramedics’ contracts in respect to holiday pay and the requirement of the Working Time Directive (WTD).
The judge felt that both the contract and the WTD required all voluntary overtime to be included in holiday pay. Lord Justice Benn dismissed the appeal and ruled that there was no distinction in the two types of overtime and that as both could be paid on a “regular and settled” basis they should be treated as “normal remuneration”.
This reinforced the view taken in Dudley MBC v Willets  ICR 31 where voluntary overtime undertaken once a month was considered to be regular enough to be included in holiday pay.
Average over a year
Once an employee has pay that varies, even just due to additional pay elements, the Employment Rights Act, s 222 says that their holiday pay is calculated based on the average pay over the 12-week period ending with the week immediately preceding the date on which their holiday begins. Note 12 weeks, not three months, as for monthly paid staff that would be 13 weeks!
From 6 April 2020, this 12-week averaging period will be extended (in Great Britain only) to 52 weeks as a result of the Employment Rights (Employment Particulars and Paid Annual Leave)(Amendment) Regulations 2018 (SI2018/1378).
The new regulations provide that if 52 weeks of continuous work haven’t been performed by the individual prior to the holiday week, the employer must go back over a maximum of 104 weeks to establish as many weeks’ pay as possible, even if this is less than 52.
Employers and agents may need to secure timesheet data back to April 2018 to meet the requirements of these new regulations.
You should also ask your payroll software provider what support they will be giving in these calculations of holiday pay from April 2020.