Rebecca Harmer: What to pay staff on annual leave

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How much annual leave can workers take?

The Working Time Directive (Directive) governs the fundamentals of European countries’ national law to ensure that they are compatible, and provides that workers should have at least 4 weeks’ annual paid leave. The Working Time Regulations 1998 (Regulations) (adopted by Great Britain) has increased this by a further 1.6 weeks so a full-time worker in Great Britain is entitled to a minimum of 5.6 weeks’ annual leave.

Are casual and temporary workersentitled to annual leave?

All workers are entitled to annual leave under the Regulations; at the end of a contract you need to pay for any annual leave accrued, but not taken, or deduct from their salary if they have taken too much.

For workers whowork a set number of hours rather than days, their contracts should state annual leave in terms of hours and not days.  Online calculators can help: see https://www.gov.uk/calculate-your-holiday-entitlement.

What do the cases mean?

1) Lock v British Gas Trading Ltd and others held that where a worker’s salary includes contractual commission, this should be included in their holiday pay. Failure to pay commission while they are on annual leave is against the basis of the Directive.  Contractual commission should be paid during a worker’s first 4 weeks’ of annual leave.

2) 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:

a) 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

b) Relates to the “personal and professional status” of the worker such as payments relating to a worker’s seniority, length of service and professional qualifications.

3) 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 include:

  • Commission payments;
  • Incentive bonuses;
  • Overtime that workers are required to perform, regardless of whether it is guaranteed;
  • 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.

What does this mean in practice?

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.  For the remaining 1.6 weeks’ annual leave, the usual complicated calculations apply.

This is too complicated, what are the risks if I don’t do anything about pay?

Workers can raise a grievance about the alleged breach of holiday pay. They must first contact ACAS to start the mandatory Early Conciliation procedure.

1) Workers can bring a claim in an Employment Tribunal within three months’ less one day from when the payment is dueif 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) The dismissal of a worker for asserting their statutory right to take annual leave under the Regulations, will be classed as automatically unfair regardless of length of service.The Tribunal has to calculate what is just and equitable compensation; the current maximum compensation is £78,335, but there will also be additional payments.

3) 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, meaning that years of unpaid holiday pay could be recovered.

NB – Where claims are presented on / after 1 July 2015, the Employment Tribunal will only be able to look back for two years from the complaint.

4) There is a time limit of six years for a worker to make a claim for sums due under their contract of employment; civil courts have the jurisdiction.

What should I do next?

  1. Review workers’ contracts of employment to check their annual leave entitlement.
  1. Consider whether workers have a global or short contracts.
  1. Look at each worker’s remuneration and analyse additional payments to see whether they are intrinsically linked to the performance of the worker’s contractual tasks and relate to thepersonal and professional status of the worker.
  1. Based on the above, ensure that normal remuneration is paid for the first 4 weeks’ of workers annual leave, and a week’s pay is paid for the remaining 1.6 weeks’.
  1. If concerned about potential claims, you could pay workers on annual leave for three months, asthere will be no series of deductions on which to base a claim. Once this has ceased, you or your HR department can calculate annual leave payments based on the Directive’s normal remuneration and then the Regulation’s week’s pay.
  1. Consider updating contracts of employment or handbooks.

Train HR or those involved with holiday pay to understand the impact of recent case law and avoid the risk of claims.

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About Rebecca Harmer

Rebecca is a solicitor in the employment law team at Wright Hassall<UrlBlockedError.aspx>. She advises individuals and companies on all areas of employment law, including restrictive covenants, grievances, disciplinary matters, redundancy situations, unfair dismissal, discrimination and whistleblowing.

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