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There are few more vexed questions in employment law than the proper calculation of holiday pay under the Working Time Regulations. Unfortunately the answer is not getting much easier for employers. Regulation 16 provides that a workers is entitled to be paid as the rate of a “week’s pay” for each week of annual leave to which he or she is entitled under Regulation 13 (basic leave of 4 weeks) or Regulation 13A (additional leave of 1.6 weeks). For the definition of a “week’s pay” we are referred to the notoriously complex provisions of the Employment Rights Act (“ERA”) ss221-224. 

Most readers will also be aware that in relation to the basic 4 weeks leave a series of recent decisions of the European Court  (ECJ) notably British  Airways plc v Williams and Lock v British Gas  has established that the mechanism under the ERA is not fully compliant with European Law which requires that holiday pay must reflect “normal remuneration.”  Specifically this means that holiday pay  must now also reflect commission payments, incentive bonuses, and crucially overtime pay whether, guaranteed or non-guaranteed compulsory or voluntary (although in the latter case the Court of  Appeal is (as at 20 May 2019 ) considering an appeal in the case of Flowers v East of England Ambulance Trust.

In most cases the mechanism for calculating weekly pay under the ERA ss221-224 it is necessary to take an average of hours and remuneration over a 12 week period immediately prior to the leave being taken.  Although there has been no definitive ruling on the point the developments in EU law have led many employers to adopt an approach of averaging remuneration (including elements such as commission and overtime) over the 12 week period in order to seek to achieve EU law compliance. Separate from the developments in EU law the UK Government instigated the Taylor Review of Modern Working Practices in response to which the “Good Work Plan” package of workplace reforms was published in December 2018. This has led to passing of the Employment Rights (Employment Particulars and Paid Annual Leave) Amendment Regulations 2018 which are due to come into force on 6 April 2020. One of the changes flowing from the 2018 Regulations is to extend the reference period for calculating holiday pay from 12 to 52 weeks. The intention is that this longer reference period will better reflect the pay of those workers whose hours fluctuate significantly over the course of the year such as casual or seasonal workers. The impact of this will, of course, be that employers seeking to ensure compliance with European Law will have regard to the longer period when taking account of overtime and commission payments in the calculation of holiday pay.   

Note however crucially this does not take account of the important category of worker where the current 12 week period is NOT applicable to the calculation.  For such workers (often referred to as “Time Workers”) who have normal working hours but where their remuneration does not vary with the amount of work done (such as is the case with piece workers) or with the time work is done (such as is the case with shift workers) a reference period is not applicable to the calculation of week’s pay. Instead the ERA provides that such worker is simply entitled to the pay due under the contract if they work their normal working hours.  Workers will still fall into this category even if they work overtime and this definition will accordingly encompass many thousands of workers in the UK. The literal interpretation of the provisions resulted in such workers not receiving credit for overtime payments and, while we now know that this is not compliant with EU law, the question arises as to whether it will be appropriate to apply a 52 week reference period to the calculation of the holiday pay of such workers after the 2018 Regulations come into force. Technically speaking there will be no requirement to do so since no reference period requires to be applied.  Employers applying a 12 week reference period for such workers could therefore continue to do so. This would clearly however create an inconsistency where the same employer is applying a 52 week reference period for other categories of worker. Moreover continuing to adopt a 12 week period would reinforce questions about whether the reference period was truly reflective of “normal remuneration” and thus EU law compliant.  While the 2018 Regulations implement one of the recommendations of the Taylor Review by virtue of the extension of the reference period where it is already applicable by not extending the application of the reference period to all workers the Regulations look like a huge missed opportunity to ensure that the Working Time Regulations properly reflect EU law and give proper guidance to employers on this difficult issue.

If you have any queries in relation to the above please get in touch with a member of the Stronachs Employment law team.

Eric Gilligan, Partner

Chambers Leading Firm 2019

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