There have been a lot of reports in the news about changes to what staff should be paid when they are on annual leave.  However, do you know what the implications are for your business? Do HR understand the implications and are they armed with enough information about the recent developments to limit Tribunal claims? 

As we all know law is a mine field, and unfortunately the Working Time Directive (governed by Europe) and the Working Time Regulations 1998 (adopted in Great Britain) which govern holidays do not provide a lot of clarity.  However, hopefully this article from Rebecca Harmer, Employment Lawyer with Wright Hassall will help. To read the original article or find more advice on what staff should be paid when they are on annual leave please see our website.

Background – What is the amount of annual leave available to workers?

The Working Time Directive (Directive) governs the fundamentals of what European countries’ national law should contain so that they are compatible. 

• The Directive provides that workers should have at least 4 weeks’ paid leave per year. 
• The Working Time Regulations 1998 (Regulations) has increased this by a further 1.6 weeks’. 
• As a result, a full-time worker in Great Britain is entitled to a minimum of 5.6 weeks’ annual leave per year i.e. 28 days’.  A part-time worker’s entitlement is reduced to take into account the number of days they work.

(It is worth noting that seafarers and those working in civil aviation are excluded from the WTR, although the Civil Aviation (Working Time) Regulations 2004 is similar in some respects.)

Many workers receive more than 28 days’ annual leave under their contract of employment, and manufacturers tend to reward employees’ with long service by increasing their holiday days.  Therefore you should check your workforce’s entitlement.

1. I have casual and temporary workers, are they entitled to annual leave?

These types of workers are regularly utilised in manufacturing organisations, and they too are entitled to annual leave under the Regulations; it does not matter how long you have engaged them for.  If annual leave has been accrued and untaken at the end of the worker’s contract, they will need to be paid for this.  Alternatively, if too much annual leave has been taken, you can ask for repayment of the sums due, or deduct it from the worker’s salary as long as this is permitted in their contract.

You also need to look at whether the workers have short discrete contracts, or a global contract.  The former means that annual leave can be taken or paid at the end of the contract.  The latter means that workers accrue annual leave even when they are not working, such as Summer and Christmas shut-down periods (particularly in the automotive sector for example).

Manufacturers also widely use workers who work a set number of hours and not days and their contracts should state annual leave in terms of hours and not days.  There are online calculators to help with this.

2. What do the cases mean?

a)     Lock v British Gas Trading Ltd and others held that where a worker’s salary includes contractual commission and no such commission is paid while they are on annual leave, they will be at a financial disadvantage and may not want to take annual leave.  This is contrary to the basis of the Directive, and as a result contractual commission should be paid during a worker’s first 4 weeks’ of annual leave.  (Remember we are talking about the 4 weeks’ entitlement under the Directive, not the total 5.6 weeks’ under the Regulations.) This could be significant where commission is not paid for workers during periods of shut-down for example.

b)    The recent case of Williams and others v British Airways plc held that during the first 4 weeks’ of annual leave, workers should not just receive basic salary but also remuneration which:

1. Is “intrinsically linked to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration“; and
2. Relates to the “personal and professional status” of the worker. This would include payments relating to a worker’s seniority, length of service and professional qualifications.

c)     Under the Regulations, workers are entitled to be paid during the 1.6 weeks’ annual leave at a rate of a week’s pay calculated in accordance with the complicated “week’s pay” regime under the Employment Rights Act 1996.   

However, the Directive states that workers must have the right to normal remuneration as was held in Bear Scotland Ltd v Fulton and another.  Examples of normal remuneration, assuming they are intrinsically linked to the worker’s contractual duties, are:

• Commission payments;
• Incentive bonuses;
• Overtime that workers are required to perform, regardless of whether it is guaranteed;
• Payments that relate to the “personal and professional status” of workers, such as those based on seniority, length of service or professional qualifications;
• Productivity/performance bonuses;
• Shift allowances and premiums (additional rates for working particular shifts, such as “time and a half”);
• Standby payments and payments for emergency call-out duties; and
• Travel and other allowances that are treated as taxable remuneration.

The following elements of remuneration should not be included in the calculation of holiday pay under the Directive:

• Benefits in kind;
• Bonuses not linked to workers’ performance;
• Expenses (including travel expenses) which reimburse workers for costs incurred; and
• One-off bonuses and occasional payments.

Voluntary overtime (where overtime is offered to the worker but they do not have to accept it) was considered by the Northern Ireland Court of Appeal in Patterson v Castlereagh Borough Council [2015] NICA 47. The court held that there is no reason in principle why voluntary overtime should not be included in statutory holiday pay, but it is a question for each tribunal to determine. This is not binding on our national courts but does provide useful guidance.

3. What does this mean in practice?

1. During the first 4 weeks’ of their annual leave entitlement you will need to calculate a worker’s normal remuneration which includes the elements set out above. 
    
2. For the remaining 1.6 weeks’ annual leave, the usual complicated calculations apply; with normal working hours generally excluding basic overtime, and non-normal working hours being determined over the previous 12 weeks’  including overpayments and commission.
    
3. This is too complicated, what are the risks if I don’t do anything about pay?

Workers could raise a grievance about the alleged breach of holiday pay and therefore a lot of time and potentially money will be involved in the process.  If workers wish to present a claim to an Employment Tribunal, they will also need to contact ACAS to commence the mandatory Early Conciliation procedure (this is where ACAS attempt to settle the claims before the parties proceed to an Employment Tribunal).  Again, there will a huge investment in time and potentially money for this mandatory step. 

The potential claims available to workers are:

1. Under the Regulations, a worker can bring a claim in an Employment Tribunal if their employer does not:

   a)     Allow them to take their statutory leave entitlement.

   b)    Pay them in respect of unused leave on termination of employment.

   c)     Pay them a week’s pay for each week of leave.
    

2. These claims should be brought within three months’ less one day from when the payment is due.  Compensation for a) above is based on what an Employment Tribunal determines is just and equitable.  The compensation under b) and c) is the actual amount due to the worker.
    
3. Where a worker is dismissed for asserting their statutory right to take annual leave under the Regulations, the dismissal will be classed as automatically unfair.  Their length of service does not matter, and it will simply be an exercise for the Tribunal to calculate what is just and equitable compensation. The current maximum compensation is £78,335, but there will also be other payments on top of this.
    
4. Unpaid statutory holiday pay can give rise to a claim of unlawful deductions from wages.  This is significant because the claim will need to be brought within three months of the last in a series of deductions, and up to two years of unpaid holiday pay can be recovered. 

What should I do next?

1. Review workers’ contracts of employment to check their annual leave entitlement.
2. Consider whether workers have a global or short contracts.
3. Look at each workers’ remuneration and analyse additional payments (such as commission and bonus etc) to see whether they are intrinsically linked to the performance of the worker’s contractual tasks and relate to the personal and professional status of the worker.
4. Based on the above, ensure that normal remuneration (see number 3 above) is paid for the first 4 weeks’ of workers annual leave, and a week’s pay is paid for the remaining 1.6 weeks’.
5. If you are concerned about potential claims, you could pay workers on annual leave in line with the Directive for three months, as there will be no series of deductions to base a claim on.  Once this has ceased, you or your HR department can begin to calculate annual leave payments based on the Directive’s normal remuneration and then the Regulation’s week’s pay.
6. Consider updating contracts of employment or handbooks to ensure everything is clear and set out in writing. 
7. Train HR or those involved with holiday pay. 

5. Final Note

We hope that the above information arms you with enough information to understand the recent cases and how they could impact you and your organisation.  This is the tip of the ice-berg when it comes to the immensely complicated Directive and Regulations; however, we are always happy to help in whichever way we can.  From experience, it is better to be active about these important issues rather than reactive to potential claims which could cost your organisation a lot more.