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Five tricky issues when calculating holiday pay

Calculating holiday pay can be a difficult and complicated area of employment law to navigate. There have been a number of notable cases handed down over the last five years, and it’s fair to say that further clarity is still needed for employers.

In this article, we discuss five different areas that employers often have to grapple with when tackling holiday pay issues.

1. Should you include voluntary overtime in holiday pay?

Flowers v East of England Ambulance Service NHS Trust [2019]

In 2019, the Court of Appeal confirmed that when calculating holiday pay for the four weeks of holiday entitlement under regulation 13 of the Working Time Regulations (WTRs), 'normal pay' is that which is 'normally received'. Indeed, the Court expressly approved the overarching principle established by the Court of Justice of the European Union that holiday pay should correspond to normal remuneration so as to not discourage employees or workers from using their statutory annual leave entitlement.

In the Flowers case, the Claimants were all employees of the NHS Trust who worked voluntary overtime for the ambulance service. On hearing their claim for holiday pay, the Court of Appeal stated that holiday pay must include ‘regular voluntary overtime’ and that it is for an Employment Tribunal to determine, on a case-by-case basis, whether a particular pattern of voluntary overtime is sufficiently regular and settled for it to come within normal pay and therefore to be taken into account when calculating holiday pay.

Although this case confirms that there are instances where voluntary overtime must be included, it is disappointing for employers that the decision has not provided absolute clarity on what level or pattern of overtime will actually amount to a regular and settled pattern such that it should be included in holiday pay. Although, in a previous related decision, the Employment Appeal Tribunal (EAT) agreed with a first instance Tribunal judge that overtime worked one in every four or five weeks would be sufficiently regular to count as ‘normal remuneration’.

This means a business will be required to monitor the overtime allocated to its employees and use its own judgment as to whether a pattern of voluntary overtime has a sufficiently regular appearance so as to be taken into account in calculating holiday pay for their workers and employees.

2. How should you calculate holiday leave and pay for part time workers?

The Harpur Trust v Brazel (UNISON intervening) [2019]

This case sought to clarify the position of a worker’s entitlement to holiday leave and pay where the worker is engaged on a term time basis.

Many employers calculate holiday entitlement for part time workers as 12.07% of hours worked. This is on the basis that workers are entitled to 5.6 weeks’ paid holiday each year (i.e. 52 weeks). Subtracting 5.6 weeks holiday leaves 46.4 working weeks in the year. 5.6 is 12.07% of 46.6 weeks so this figure represents holiday expressed as a percentage of working time.

Ms Brazel was a music teacher employed by the Harpur Trust on a part-time basis, working predominantly during school term times each year. The Trust argued that, as a result of her irregular working, she was entitled to holiday leave and pay based on an entitlement of 12.07% of the hours she worked over the term. However, she claimed that such a calculation was not prescribed under the WTRs and that she was underpaid her holiday pay.  In particular, she argued the 12.07% method does not work where there are weeks during which the worker remains under contract but does not work, as was the case for Ms Brazel.

The Court of Appeal acknowledged that the WTRs base holiday entitlement on a proportion of the number of weeks in the holiday year that the worker has been engaged, regardless of the amount of work done and therefore in this case they agreed that it was not appropriate to pro rate the holiday leave and pay according to the number of weeks actually worked.

This case demonstrates the care that employers will need to take when calculating holiday pay for part time workers.  Employers who currently use the 12.07% approach to pay holiday can continue with this approach where the worker is expected to do some work every week throughout the year. However, where a worker only works part of the year, the correct approach is to provide the full 5.6 week’s annual leave with holiday pay calculated by assessing a week's pay and multiplying this by 5.6. The Brazel case is currently under appeal to the Supreme Court so it is hoped that further clarity on this issue will be forthcoming.

3. Do workers accrue holiday when they take it, but are not paid for it?

Smith v Pimlico Plumbers Ltd [2021]

By way of background to the Smith case, in November 2017, the European Court of Justice ruled in the case of King v The Sash Window Workshop Ltd that a self-employed salesman, who was found by the Courts to have worker status, was not granted the paid holiday to which he was entitled.  He was never offered paid holiday (as he was regarded as self-employed) and he never asserted the right to it but was successful in arguing that it accrued during the 13-year period that he worked for Sash Windows and that he was therefore entitled to payment of untaken but accrued holiday spanning that time period.

The subsequent case of Smith, which was handed down in early 2021, provided some additional clarity about how workers accrue holiday.

In this case, Mr Smith, who was also determined to be a worker, had taken various days off but had not been paid for them. As a worker, he was entitled to holiday pay. The Employment Tribunal, however, dismissed his claim, on the basis that it was out of time; his last unpaid period of holiday was taken in February 2011 and he had 3 months from that date to bring his claim for unlawful deductions (rather than from the later date in August 2011 when his contract was terminated). Mr Smith challenged this ruling, arguing that he was entitled to a backdated payment for all of the unpaid annual leave he had taken during his employment up to the point of termination and that time for bringing his claim therefore ran from the termination date.

Mr Smith relied on the principles established in King (set out above) to assert that his claim was in time and that it only arose on termination of his employment in August 2011. However, the Employment Tribunal held that the principles in King did not apply as they should only apply where the worker has not taken their holiday because they would not be paid for it, not where they have taken it (as Mr Smith did) but have not been paid for it.

Mr Smith appealed to the EAT, who upheld the Tribunal’s decision. The EAT confirmed that the purpose of the principles in King were to ensure that workers are given enough time to rest and that they are not dissuaded from exercising their right to take annual leave.

Whilst this is a useful decision for employers, it is limited in terms of the help it provides, since it is limited to situations where holiday has been allowed but has not been paid. Where, for instance, an employer refuses to allow a worker to take holiday, or where the worker does not take holiday because they know it won’t be paid, the principle in King will still apply entitling the worker to claim for backdated holiday at the point of termination.

4. How far back can a claim for holiday pay go?

Chief Constable of the Police Service of Northern Ireland and another v Agnew and others [2019]

The ability for a worker to claim back pay for historical underpaid holiday based on there having been a series of unlawful deductions or underpayments was somewhat limited by the EAT’s decision in Bear Scotland Ltd v Fulton and other cases. The EAT found that where there is a gap of 3 months or more between periods of underpaid holiday, the series of deductions is broken and the time limit for bringing a claim expires. This principle has proved invaluable to many employers arguing the issue of back payments over the years.

In 2019, the Northern Ireland Court of Appeal in Agnew held that the historic decision in Bear Scotland was incorrect and that a series of deductions is not broken by lawful payments, or by a gap in payments of three months or more.

Although concerning for employers with bases in Northern Ireland, this decision does not directly affect holiday pay calculations in the rest of the UK (as yet) as the decision is not binding on the rest of the UK courts. As a result, for employers in the rest of the United Kingdom, the decision in Bear Scotland still stands. However, other UK employers should not ignore the Agnew decision altogether as certain aspects of the Agnew decision may prove persuasive if a further appeal were to be brought in the Court of Appeal in England in relation to any of the points raised. Employers should therefore keep a careful eye on any developments in this area.

Employers in England, Scotland and Wales also have the benefit of the Deduction from Wages (Limitation) Regulations 2014 which impose a cap of 2 years on retrospective unlawful deduction from wages claims, including those for holiday pay, in respect of claims brought on or after 1 July 2015.

5. What is the impact of furlough on holiday accrual and pay?

Mr D Perkins v Best Connection Group Limited [2021]

This case concerned a worker who tried to claim he was entitled to holiday pay during the period he was placed on furlough under the Coronavirus Job Retention Scheme (CJRS).

The contractual agreement between Best Connection and Mr Perkins contained an express provision that Mr Perkins would not receive payments in respect of holiday, illness or absence unless he was on assignment.

In light of this provision, Best Connection argued that for the period when Mr Perkins was on furlough, he was not working on an assignment. As a result, they said, he was not a worker during the furlough period and was not entitled to any holiday pay in line with the terms of his contract.

The Employment Tribunal agreed with Best Connection’s argument and ruled that holiday pay was not an entitlement for Mr Perkins during his furlough period because he was not on assignment at the time.

The Employment Tribunal’s decision reflects the fact that the Claimant only had worker status when actually carrying out an assignment. However, employers should be mindful that the position would be different for an employee under a contract of employment who would have continued to accrue holiday, despite being placed on furlough. The case also confirms that being placed on furlough does not alter an individual’s right to holiday pay.

Summary

As highlighted within this article, holiday pay claims have been a ripe area for employment litigation for many years and we consider that this trend is set to continue.

As further cases weave their way through the Courts, employers will need to keep abreast of any binding authorities that changes the way they handle the issue in practice.

If you feel that your organisation would benefit from an annual leave audit to assess your current compliance, please get in touch with us.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2021.

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