Calculating the correct amount of holiday pay owed to an employee under the Working Time Regulations 1998 (‘WTR’) has historically proven to be a tricky task for employers.
Whilst the WTR specifically provide that non-contractual hours of work should be ignored when calculating holiday pay, they do require an employer to firstly identify an employee’s “normal working hours” and a “week’s pay” before applying the relevant calculation. In practice, this isn’t quite as easy as it sounds.
In 2011, the case of Williams and others v British Airways shed some light on the situation and potentially simplified it. The court held that the WTR should be interpreted in the spirit of European law on working time. The court held that holiday pay should be calculated with reference to both basic pay and any other pay which is “intrinsically linked” to the work that the employee carries out. That is, overtime and other pay premiums.
Although Williams sent a clear message to UK employers, the principles remained untested until very recently in the case of Neal v Freightliner.
Mr Neal worked as an Operative at Freightliner’s depot in Birmingham.
His employment contract required him to work 7-hour shifts, totalling 35 hours per week. The contract also stated that he may be required to work overtime when necessary.
In reality, Mr Neal’s shifts and working hours were determined by a roster system. He regularly worked up to 9 hours each day and, occasionally up to 12 hours to cover for his colleagues. Mr Neal received enhanced pay premiums when working over and above his contractual 7 hours per day.
Mr Neal believed that he had no choice but to work the significant hours set out in Freightliner’s rosters. He therefore felt that his holiday pay should reflect the actual pay that he received rather than his basic salary alone.
Freightliner disagreed – claiming that Mr Neal’s overtime work was voluntary and that his holiday pay should only take account of his basic pay, which was how it had always calculated Mr Neal’s holiday pay entitlement.
Having exhausted Freightliner’s internal grievance procedure on this difference in approach, Mr Neal presented a claim to the Birmingham Employment Tribunal for breach of the WTR and unlawful deductions from wages under the Employment Rights Act 1996.
The Tribunal applied the case of Williams to Mr Neal’s case and highlighted that the WTR do not adequately implement European law on working time.
The Tribunal held that hours worked by Mr Neal over and above his contractual 7 hours were “intrinsically linked” to his performance of his role, and that it was therefore irrelevant whether the overtime he did was voluntary or not.
As a result, the Tribunal found that Mr Neal had been underpaid in respect of his holiday pay entitlement. With the Tribunal’s permission, the parties arranged an out of court settlement.
In reaching its decision on Mr Neal’s claim, the Tribunal rejected Freightliner’s argument that workers might be encouraged to undertake paid overtime to manipulate the level of their holiday pay. The Tribunal concluded that, in practice, employers are still able to control the levels of overtime offered and accepted by their staff.
The learning points
Whilst the Tribunal’s decision in this case could still later be tested by the higher courts it is important, at least for the time being, that employers understand its implications.
Any paid overtime (whether voluntary or not) should now be considered alongside other premiums in holiday pay calculations. In effect, holiday pay calculations are moving towards being based on the average earnings of a worker in the 12 weeks before their holiday.
Employers should also review their overtime arrangements to ensure that they have sufficient control over them - avoiding abuse and manipulation of holiday pay.
As an added complication, the decision in this case only related to the 4 weeks’ holiday pay that workers are entitled to under European law. It did not apply to the additional 1.6 weeks’ holiday that workers are entitled to under UK law. Therefore it seems likely that this will be appealed to clear up the confusion and avoid a situation where there are different rules for different weeks of a worker’s holiday.
As always, if in doubt, seek specialist legal advice when calculating holiday pay to avoid receiving a costly and time-intensive Tribunal claim as happened in this case.
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