Although it does not represent a change in the law, the recently publicized holiday pay issue affecting employees at John Lewis underlines the need for employers to reassure themselves of their holiday pay calculations. In the light of recent cases, and some which are currently before the courts, the issue of holiday pay looks likely to remain a key issue for many HR departments in the near future.
Holiday Pay Calculations
Under the Working Time Regulations 1998 ("WTR"), workers are entitled to statutory minimum holiday of 5.6 weeks (28 days for an employee who works five days a week), inclusive of bank holidays. Many employers offer more holiday than this, but the holiday pay rules in the WTR referred to below only apply to the statutory minimum holiday entitlement.
Workers are entitled to be paid at a rate of a week's pay for each week of their statutory minimum holiday entitlement. The calculations required to determine a week's pay for these purposes are immensely complex. In summary, the calculation depends on the worker's working pattern, as follows:
- Those who have normal working hours and whose pay does not vary with the amount of work done or the time at which they work during those normal working hours. These staff receive their normal week's pay for each week of holiday.
- Those who have normal working hours but whose pay varies with the amount of work they do or the time at which they work. A week's holiday pay for these staff is calculated by averaging relevant earnings over a 12-week period.
- Those who do not have normal working hours. A week's holiday pay is again calculated by averaging earnings over a 12-week period, although there are small but important differences in the sums to be taken into account for these purposes.
Recent press coverage has highlighted the significant holiday pay issue faced by the department store chain John Lewis. According to press accounts, the issue related to the holiday pay received by those John Lewis staff whose normal working hours included Sunday or Bank Holiday shifts. It is reported that those shifts attracted additional payments, thereby placing those staff into category 2 above. However, those additional payments were not taken into account in calculating holiday pay.
Following a review of its holiday pay policy, John Lewis concluded that the exclusion of those additional payments was incorrect, since the WTR required that they be included. This mistake appears to have extended as far back as 2006, and relates to a large number of staff, with the result that the cost to John Lewis of correcting this error had been put at a figure of GBP 40 million.
Readers will have read the recent Tribunal case of Neal -v- Freightliner, which also concerned a category 2 employee, and the issue of whether overtime payments which are not compulsory or guaranteed should be included in the calculation of holiday pay.
The issue of holiday pay remains one where further legal developments are very likely. The Neal decision is now the subject of an appeal to the Employment Appeal Tribunal. Since decisions at that level are binding on Tribunals, it would represent a material change to the law if it is upheld at that level. Meanwhile, in the case of Lock v British Gas Trading Ltd, an Employment Tribunal has referred to the Court of Justice of the European Union the issue of whether it is lawful to exclude commission from the calculation of holiday pay. Again, the outcome of that decision could have a significant impact both on future holiday pay practice, and liability for past calculations.
In a further recent development, the Tribunal in Podlasiak v Edinburgh Woollen Mill Ltd examined the issue of pay in lieu of accrued holiday on termination. It involved an employee who worked under a zero hours contract (category 3 in the list of categories above), whose contract provided that, on termination of employment, she would be paid the token sum of GBP 1 in lieu of untaken statutory holiday. Although, read literally, the WTR would appear to permit a token payment to be made where a relevant agreement (such as a contract of employment) provides for that, the Tribunal held that principles of European law required the payment to equate to the sum that the employee would have received had they taken holiday during their employment.
Neither of the decisions in Neal or Podlasiak is binding on other Tribunals, and the issue faced by John Lewis appears to represent no more than a simple (albeit very expensive) error. None of those issues changes the correct manner of calculating holiday pay, and we would advise against any wholesale redesign of holiday pay calculations made in reliance on them.
That said, however, the law on holiday pay is in a state of flux. Recent activity in this area, and in particular the fact that Neal has been appealed to the EAT and Lock referred to the CJEU, suggests that employers should maintain a watching brief on this issue. We will continue to report on developments in this area as they arise. In the meantime, employers wishing to stay ahead of the curve may wish to review their existing approach to holiday pay, both to reassure themselves that their current approach is compliant, and to understand what administrative and financial hurdles they may face in the event of a change in the applicable calculation.