In an industry like hospitality, where hours can be long and can vary from week to week, the question of holiday pay is likely to be one that vexes many employers.
Under the Working Time Regulations 1998, full time workers are entitled to 5.6 weeks' paid holiday per year i.e. 28 days including bank and public holidays (known as 'statutory annual leave'). Under Regulation 16 of the Working Time Regulations, a worker is entitled to be paid during statutory annual leave at a rate of a week's pay for each week of leave.
How is a week's pay calculated?
Where a worker has normal working hours and their pay does not vary with the amount of work done (e.g. salaried workers), they are entitled to holiday pay equal to 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". Until recently this has meant their basic contractual salary, without any additional bonus or commission payments. However, this is not always clear. Payment of gratuities could also fall into this grey area.
Where a worker has normal working hours but their pay varies according to the amount of work done or the time of their work (e.g. if they are paid shift premiums for working antisocial hours) then their holiday pay should be calculated by reference to their average pay during their normal working hours over the previous 12 weeks. This should include any commission payments or payments of a similar nature. As stated above, it is arguable this would include a sum equivalent to what they would have otherwise earned in gratuities had they been at work.
Guaranteed or compulsory overtime counts as normal working hours however, where overtime is voluntary and in particular where it varies from week to week, historically it has not been included in calculations of holiday pay for workers with "normal" (e.g. prescribed) working hours.
Where a worker does not have normal working hours and they work different hours each week then a week's pay for the purposes of calculating holiday pay is calculated as an average of all of the sums earned in the previous 12 working weeks, including any overtime payments or commission. Again, it is not clear whether gratuities would fall into this but it is certainly arguable.
Neal v Freightliner Ltd
As if the above was not difficult enough, a recent employment tribunal decision has further complicated matters.
In the case of Neal v Freightliner Ltd the employment tribunal decided, by reference to an earlier European Court of Justice decision (British Airways plc v Williams), that the Working Time Regulations 1998 did not adequately implement European law on working time. In Mr Neal's case, overtime was not described as being compulsory; his contracted hours were seven hours a day, when in fact he always worked shifts of at least eight and a half hours and he had not worked a seven hour shift since starting with the company in 2007. The tribunal therefore held that when he was working hours above his minimum contracted hours, although (according to evidence put forward by the company) he was not necessarily required to work those hours (and therefore the overtime could loosely be described as 'voluntary'), he was still doing work that was "linked intrinsically to the performance of tasks which [he] was required to carry out under his contract of employment". Therefore overtime payments and shift premia had to be included in his holiday pay. However, this only related to the four weeks' annual leave under the Working Time Directive and not the additional 1.6 weeks' leave granted by the UK Government under the domestic Working Time Regulations.
The tribunal decision in this case is not binding on other tribunals and courts and the employer has applied for permission to appeal to the Employment Appeal Tribunal so it could be overturned. In the meantime, this is an issue that employers should keep under review as it is likely that other similar cases would be decided in the same way because of the European elements. This puts employers in the difficult position that, although the law has not necessarily changed, how the law will be interpreted following this case is likely to be different and employers who operate a policy of excluding overtime and other additional payments from holiday pay could be left exposed to a successful challenge.
An additional point to note is that Mr Neal was held to be entitled to significant back pay and the tribunal commented that back pay could be awarded going back to 1998, when the Working Time Regulations came into force. Any challenges brought by workers could therefore include significant back pay elements. For employers who adapt the way that they calculate holiday pay promptly, any claims that are not brought within three months of that change will mean that back pay claims are time barred.
Therefore, whilst there is currently no legal obligation to do so, employers may consider it prudent to use a worker's actual pay during the preceding 12 week period, including any overtime and any other additional payments, when calculating their average earnings for the purposes of holiday pay calculations. However employers should be alive to the risk of workers seeking to work excessive overtime in the 12 weeks leading up to a holiday in order to bolster their holiday pay. Employers should also be reminded that this decision only applies to the first four weeks of a worker's annual leave entitlement; although the administrative effort involved in applying that principle and paying two different rates for annual leave may lead employers to conclude that it is simply easier to ignore this point and calculate holiday pay on a uniform basis. Employers should also consider amending holiday policies or employment contracts to make it clear how holiday pay will be calculated.
However, given that the case is still subject to appeal any employers who do decide to amend their policy on the back of it should make it clear to their workforce that they reserve the right to change their policy back if the Neal case is overturned on appeal. It is likely to be a subject of heated debate in the Employment Appeal Tribunal in due course; in particular, there are a number of good policy reasons why the decision should be overturned although with the weight of European case law behind the decision, it is perhaps unlikely to be.
Prepared by Bond Dickinson