A series of court cases over the last three years have made it hard for employers to know what elements of pay should be included when calculating holiday pay. So what are the dangers?
By Claire Maclean
What legal issues have arisen around calculating holiday pay?
Tens of thousands of holiday pay claims lodged with the Employment Tribunal have been on hold pending the outcome of appeals in the cases of Bear (Scotland) and Lock v British Gas. The test laid down and applied by the European courts is that any payment which is “intrinsically linked to the performance of the tasks under the contract” should be included in holiday pay. Applying that test, the case of Lock v British Gas confirmed that Mr Lock’s commission payments should be included in the calculation of his holiday pay. Since then, the Employment Appeal Tribunal (EAT) has applied the guidance in the Bear (Scotland) case and found that regular overtime, which employees are obliged to perform if requested, should be included in payments for holiday pay. The jury is still out on the issue of voluntary overtime, but the current direction of travel indicated by a number of Employment Tribunal decisions – based on their own facts and circumstances – suggests that payments for regular voluntary overtime may well be treated in the same way.
Is there a risk of back-dated claims?
With effect from July 2015, a two-year limit on backdated claims for holiday pay was introduced, but it may be possible for an employer to argue that claims should cover a shorter period. The recent EAT decision in Bear (Scotland) found that claims for underpaid holidays will not succeed if there has been a period in excess of three months between the alleged underpayments of holiday pay. It is important to keep in mind that (a) it is not a three month gap between holidays, but a three month gap between the payments for those holidays, and (b) these principles are only likely to apply to the minimum four weeks set down in the Working Time Directive and not the additional 1.6 weeks statutory leave in the UK Working Time Regulations, or any contractual leave entitlement in excess of the statutory minimum.
What does this mean for employers in the grocery sector?
Any payment made where there is an intrinsic link between the work carried out and the individual’s role should be included in the calculation of holiday pay. The next step is for employers to consider whether there are any other forms of variable pay which will need to be factored into holiday payments to satisfy the test set down by the European courts. This needs to be assessed on the individual facts and circumstances of each case.
Will the decisions of the European court still stand after Brexit?
The flurry of holiday pay cases all started with a decision by the European Court of Justice back in 2014, and holiday pay is one of a number of areas of the Working Time Regulations in which many employers would welcome change should post-Brexit flexibility allow it. Therefore, it is possible we may see a move to limit holiday pay to basic pay only. However, with no certainty or timescales for such a move, businesses operating in the grocery sector must ensure they stay on the right side of the existing provisions and case law.
Claire Maclean is a senior solicitor in Maclay Murray Spens’ employment, pensions and immigration practice.
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