The recent announcement that the Police Federation in England and Wales will include overtime in their holiday pay from January 2016, once again raises the question of how employers should approach the calculation of holiday pay.
It is certainly the minority of employers who have adopted the practical approach of changing their holiday pay calculations now before the law is settled in this area. And of course the pressure to make this change will be heavily influenced within a workplace by industrial relations issues or whether an employer has received tribunal claims.
Many employers are waiting for further clarification from the courts on this issue, in particular the EAT judgment in Lock v British Gas. Although the appeal was heard on 8/9 December 2015, the judgment is not expected in this case for another 2 months. Lock v British Gas dealt with commission based payments and it may be the case that the judgment focuses solely on this aspect rather than providing any broader guiding principles around variable pay.
To recap, (for anyone who has missed the recent developments in holiday pay), a number of cases have challenged the previously accepted position that employees who have “normal working hours” should not have overtime and variable payments included in the calculation of holiday pay. It has always been the case that employees who do not have “normal working hours” should have these payments included in their holiday pay.
Should voluntary overtime be included?
The biggest gap in what we know from the case law relates to the payment of voluntary overtime (voluntary overtime being defined as work that an employee can refuse, and which the employer is not obliged to offer).
So far we have one case, Bear Scotland v Fulton which says that non-guaranteed overtime (where the employee is obliged to work overtime if required, but the employer is not obliged to provide overtime) should be included in holiday pay.
In addition the Northern Irish case of Patterson v Castlereagh Council also considered whether voluntary overtime should be included in holiday pay, and came to the conclusion in that case that it should, explaining that it will be a question of fact in each case whether it is included. The issue is whether the overtime is paid with sufficient regularity to be part of ”normal remuneration” which would suggest that one-off instances of voluntary overtime should not be included.
What aspects of variable pay should be included?
There are a number of aspects of variable pay which we do know should be included in holiday pay for example:
- travel allowances
- standby payments
- acting up supplements
The most common component of variable pay is of course bonuses. The position regarding bonuses is not clear, although most employers have adopted the approach of not including them. If the payment solely relates to corporate performance then this is clearly not part of an inpidual’s regular earnings nor is it “intrinsically” linked to what they do. The grey area relates to bonuses which are directly affected by inpidual performance. There has been no case law on this issue, and given the significant cost implications we are not aware of any employers including bonus payments in holiday pay.
If variable pay is included – what is the reference period?
Unfortunately there is no definitive answer on the reference period point either. Lock v British Gas said the period should be 12 months – but the test is whether it represents a normal working period, so the answer (if we ever get one) may involve a variable test, since some commission schemes fluctuate significantly in a 12 month period requiring a longer reference period yet in other cases like voluntary overtime the 12 week period contained within the Employment Rights Act 1996 may be suitable.
A further employment tribunal decision is expected in Lock which will deal with the reference period. So we may get some limited guidance there, which unhelpfully because of the legal status attached to employment tribunal decisions will not be binding.
What is the approach of the courts to cases already raised?
In June last year there were 21,000 holiday pay claims in Scotland. The tribunal service in Scotland has taken the approach of sisting the case (putting the case on hold) pending clarification of the law from the appellate courts in this area. In England preliminary hearings have taken place where claimants have been requested to provide further particulars of their claims in relation to the type of variable pay and the total shortfall in pay.
What should employers do?
Our advice remains that there is insufficient clarity from the case law at this present time to formulate a cohesive approach to variable pay or the reference period. For some employers facing pressure from claimants or union representatives, the wait and see approach may not be a realistic strategy.
Certainly there is no obligation to enhance holiday pay over the full annual entitlement – it only applies to the minimum statutory period of 4 weeks leave from the Directive. However this can raise more problems for employers in determining when a holiday falls under the Directive leave or is outwith this period. In Bear Scotland the court said an employer could choose when a holiday falls within the 4 week period or not. We would recommend that legal advice is taken before any change in approach is adopted to make sure that all the different issues are applied within a strategy, including the 2 year limitation period for claims raised after 1 July 2015. We will be sending a law-now following the EAT decision in Lock v British Gas.
