August 23, 2013

Holiday Pay – the pitfalls

Apparently they got the calculation wrong and failed to make the correct payments to staff who worked on Sundays and bank holidays. They have admitted that they did not implement the Working Time Regulations correctly and have taken steps to rectify this. Working out holiday pay for atypical workers is a complicated business which is easy to get wrong, and potentially expensive to put right, as John Lewis and the employer referred to below found out.

A recent case on the calculation of holiday pay endorses the difficulties John Lewis must have faced. Neal v Freightliner Limited concerned a freight worker who worked a basic 35 hour week comprising seven hour shifts, although in reality his shifts were more usually 8.5 - 9 hours, and occasionally 12 hours. His hours varied day by day in accordance with a weekly roster and any hours which he worked over his contractual hours were said to be voluntary, although he was paid overtime for these, and also a shift premia for some of his additional hours. These additional hours were not taken into account when his holiday pay was calculated. He brought a claim for unlawful deduction from wages, being underpayment of holiday pay, and asserted that this was a breach of the Working Time Regulations.

The tribunal decided that Mr Neal was entitled to have his overtime payments and shift premia counted towards the calculation of his holiday pay, and the fact that the hours worked over his contractual amount were voluntary was immaterial. In coming to its decision, the tribunal followed the European Court of Justice decision in relation to airline pilots, decided last year, that holiday pay must relate to a worker’s normal remuneration; so if normal remuneration includes payment for work which is intrinsically linked to the performance of the individual’s duties, it should be taken into account when calculating holiday pay.

In the pilot case, the European Court of Justice reviewed the European Union Working Time Directive, and stated that holiday pay must correspond to a worker’s normal remuneration for the work undertaken which is intrinsically linked to the duties which they are required to carry out under their contract. When the case returned to the Supreme Court, the Court implemented the ECJ decision by holding that the pilots’ holiday pay should be calculated by assessing the average payments made over a representative reference period, and that this must include their flying pay supplements.

Consequently, in the Neal case, the tribunal concluded that it was very obvious, based on the decision in the pilots case, that Mr Neal’s holiday pay should be calculated taking into account, not just his basic salary, but the other payments made to him (overtime and shift premia) which he received for carrying out his duties. The tribunal looked at the Working Time Regulations and the interrelated sections of the Employment Rights Act, which together govern the calculation of holiday pay. Without going into the complexities of the legislation, the tribunal concluded that this would result in Mr Neal receiving less than the average remuneration to which he was entitled, contrary to the ECJ/Supreme Court decision. It therefore decided to construe the relevant section of the Working Time Regulations as if some words were added to ensure that the effect of the interrelated sections did not result in an individual receiving less holiday pay than that to which they were entitled. This achieved an equitable outcome, not only for Mr Neal, but also others who work varied hours and receive differing payments according to the hours they work.

The John Lewis case highlights the complication in calculating holiday pay and they have observed that this has become more so in recent times because the case law no longer reflects the literal wording of the regulations. Hence the tribunal in the Neal case construing some additional wording to reflect the up-to-date position in the case law.

The learning for employers is that they must remember to take the average of all payments made over a particular reference period (and 12 weeks is the requirement in the Working Time Regulations) when calculating payments for holiday to be made to shift workers and those who work atypical hours.

For further details on any of the issues covered in this update please contact Gemma Ospedale, Partner in Employment on 020 7583 2222 or email [email protected]

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