Ironing out tricky holiday issues


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It's the time of year when people's thoughts begin to turn to summer holidays. For employers though, holidays can pose some tricky problems.

Amongst other things there's the interaction of the separate holiday entitlements under the Working Time Directive (WTD) and the Working Time Regulations 1998 (WTR); the question of what needs to be included in a calculation of holiday pay; whether annual leave can be carried over; what happens to holiday during sick leave, and how bank holiday entitlement works.

What does the law say about holiday pay?

Article 7 of the WTD provides that member states must ensure that workers have the right to at least four weeks' paid leave. Although it does not specify how statutory holiday pay should be calculated, the European Court of Justice (ECJ) has held that "paid annual leave" means that workers on holiday should receive their "normal remuneration".

The WTD is implemented into UK law by the WTR. The WTR provide workers with 5.6 weeks' annual leave, and workers are entitled to be paid at the rate of a "week's pay" for each week of leave, calculated in accordance with sections 221 to 224 of the Employment Rights Act 1996 (ERA 1996).

What should be included in a holiday pay calculation?

Rather confusingly it will depend whether you're talking about holiday taken under the WTD or the WTR!

Under the WTD workers are required to receive their "normal remuneration" during periods of WTD leave. This means that the WTR are effectively incompatible with the WTD and must be interpreted to conform to it. Although the week's pay provisions of the ERA 1996 remain relevant for determining the additional 1.6 week holiday entitlement, the first four weeks of leave in each holiday year must be calculated in line with ECJ case law.

What difference does it make? Elements of remuneration included in the calculation of holiday pay under the WTD are commission payments; incentive bonuses; overtime pay; payments relating to the "personal and professional status" of workers; productivity/performance bonuses; staff allowances and premiums; standby payments; payments for emergency call-out duties and travel and other allowances that are treated as taxable remuneration. These will all be included assuming that they are paid regularly or repeatedly over a sufficient period to count as normal remuneration.

What about the additional 1.6 week annual leave entitlement under the WTR? For those workers with "normal working hours", a week's pay will be calculated with reference to those hours. This usually means basic salary, disregarding any overtime hours (except overtime which is guaranteed and compulsory) and without any additional bonuses, commission payments, overtime premiums or allowances. There is no reference period for this.

For workers who don’t have "normal working hours", a week's pay is calculated as an average of all remuneration earned in the previous 52 weeks, or the number of complete weeks the worker has been employed (if less than 52). Weeks in which no remuneration is due are ignored, and earlier weeks are brought into account, up to a maximum of 104 weeks before the relevant date. This will include any overtime payments and commission.

Can employees be required to take their holiday at certain times?

Yes, an employer can give notice ordering an employee to take statutory holiday on specified dates under Regulation 15(2) WTR. Any such notice must be at least twice the length of the period of leave that the worker is being ordered to take.  

It's good practice to give specific notice to employees in advance of the dates when annual leave can or cannot be taken rather than refusing holiday requests. A letter at the beginning of each leave year should do the trick!

Can you carry annual leave over to the next leave year?

The 4 weeks' WTD leave can generally only be taken in the leave year in respect of which they're due. However, there's nothing to prevent an employer from agreeing to let an employee carry forward any unused WTD leave. It's worth noting that an employer can't compel a worker to carry over WTD holiday, and any agreement to do so will be unenforceable to the extent that it seeks to prevent the worker from exercising their right to take the leave in the year it accrued. The employer will have to allow the worker the opportunity to take their WTD leave right up to the end of the leave year.

The additional 1.6 weeks' leave may be carried forward into the next leave year in accordance with a relevant agreement. This relevant agreement will generally be a term in the employment contract permitting workers to carry a certain number of days' leave forward. It is common to limit this to up to 5 days (pro rate for part-time workers), to avoid the problem of workers building up too much untaken holiday.

Can a worker claim back pay for untaken or unpaid holiday and, if so, how far back can they go?

In King v Sash Window the ECJ held that Mr King was entitled to the indefinite carry over and accumulation of the untaken part of his 4-week holiday entitlement under the WTD. The decision was considered earlier this year by the Court of Appeal in Smith v Pimlico Plumbers. Here the court held that the rules in King were equally applicable to any taken but unpaid leave (just the WTD entitlement).  

Under the WTR a worker can bring a claim for a refusal of leave, or a failure to pay for leave taken, within 3 months beginning with the date on which the requested leave should have been taken/paid for. It's also possible to make an unlawful deductions claim; this can be brought within 3 months of the last in a series of deductions. However, this is subject to a 2-year backstop under the Deduction from Wages (Limitation) Regulations 2014.

Following Smith the 2-year backstop for unlawful deductions claims won't be relevant where claims are brought under the WTR on termination, but it will be where the relationship is continuing. In this situation the claim will be better off brought as an unlawful deductions claim. Where employment terminates and a claim under the WTR is made (provided that it is presented within 3 months of termination) the individual claiming will be able to claim back to the beginning of the shortfall. In the case of those who have worker status, but have always been labelled as independent contractors, this will often be right back to the beginning of their working arrangement with the employer.

An unlawful deductions claim will still be available to those whose employment has terminated in relation to the additional leave entitlement (as the decision in Smith just deals with the 4-week WTD entitlement), subject to the claim being brought within time. This means that, provided that there's no break of more than 3 months between deductions, the claimant will be able to claim for 2 years of unlawful deduction of holiday pay for their additional 1.6 week entitlement.

What happens to holiday pay if someone's off on long-term sick?

Following the ECJ's decision in Stringer and ors v HM Revenue & Customs; Schultz-Hoff v Deutsche Rentenversicheroug Bund if workers are prevented from taking their holiday because of sickness, they must be allowed to take it following their return to work, even if this means carrying it over to the next leave year. In order to give effect to Stringer, the WTR must be interpreted to allow workers on long-term sick leave to take, and be paid in respect of, their statutory holiday entitlement.

Is there a limit to the length of time that an employee on long-term sick can continue to carry over their untaken statutory annual leave? Following case law it seems likely that 18 months (from the end of the relevant leave year) will be adopted by most employers as a sensible period of carry-over where an employee is on long term sick leave.  

How does rolled up holiday pay work, and can it still be used?

Historically employers have argued that the existing basic rate of pay includes pay for annual leave, effectively "rolling up" holiday pay into basic pay. Typically, based on the current statutory annual leave entitlement of 5.6 weeks a year, an employer would calculate rolled-up holiday pay as an additional 12.07% on top of the hourly wage.  

In Robinson-Steele v PD Retail Services it was held that rolled up holiday pay was unlawful, though it was also held that sums already paid to a worker under a rolled-up holiday pay scheme could be set off against the holiday pay due to the worker, provided that the arrangements were sufficiently transparent and comprehensible and the sums represented an addition to pay for work done.

The government guidance on holiday pay makes it clear that if a current contract still includes rolled-up pay, it needs to be re-negotiated. In practice though rolled-up holiday still happens and employers fall back on the argument that it's transparent and comprehensible (as per Robinson-Steele) and therefore lawful. 
  
How do bank holidays fit into holiday entitlement?

There is no specific statutory right to time off on a bank holiday and whether a worker can be required to work on such a holiday will be a matter for the contract. If an employer allows, or requires, workers to take annual leave on bank holidays, this will count against statutory leave. Despite this, many employers give paid holiday on the public holidays in addition to the minimum statutory leave entitlement. It's unlikely that a court would imply a contractual right to paid public holidays unless there is an established custom and practice to that effect.

What about part-time workers? Employers who only give part-time workers paid time off for public and bank holidays that fall on days on which they would normally work may be in breach of the Part-Time Workers Regulations 2000 because some part-time workers (generally those who do not normally work on Mondays, or those whose working days are variable) will be treated less favourably than comparable full-time workers. The simplest way to deal with this is to give part-time workers a pro rata entitlement to public holidays, regardless of whether they normally work on days on which those holidays fall, and to monitor the days on which they work.

It's worth noting that under the Agency Workers Regulations 2010, after 12 weeks in the same assignment agency workers have the right to the same basic pay and conditions as if they were employed directly as a supply teacher by the hirer. This will extend to holiday pay so they should have their pay calculated in the same way as permanent staff. In terms of bank holidays these will be approached in exactly the same way as they are for directly recruited staff. 

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