You cannot have missed recent newspaper headlines predicting holiday pay increases for millions of workers following a number of tribunal and court decisions.
Simon Walker, director general of the Institute of Directors, claimed: “the holiday pay time bomb could have a hugely detrimental impact on businesses. It is not an exaggeration to say that some small businesses could end up being wiped out”.
In this article I will set out the facts and what the implications might be for your practice.
The right to paid holiday
In order to understand these judgments it is important to put them in their legal context. A directive from the European Union provides that employees are entitled to four weeks’ paid leave per year. When the UK government incorporated this directive into UK law it ‘gold plated’ this entitlement by adding on an additional 1.6 weeks (eight days for full time employees) of holiday for UK workers.
To qualify for this entitlement, an employee must either work under a contract of employment or undertake to perform work personally for another party to the contract, but not as a client or customer of any profession or business carried on by that individual.
Dentists working under a standard associate contract within a practice are only in rare circumstances likely to qualify for this right. Therefore, these latest court decisions are most likely to be relevant for practice owners when managing holiday pay arrangement for their other staff, such as dental nurses and receptionists.
In order to calculate how much a worker should be paid whilst they are on holiday, an employer must establish what amounts to a week’s pay for that worker. For example, should it just include only the worker’s basic salary or other payments they regularly receive, such as overtime? It is this question which has been at the heart of of the recent cases.
The historic position
The Court of Appeal, in the case of Bamsey v Albon Engineering & Manufacturing plc [1998], decided that only hours fixed by the contract of employment should be included in calculations for holiday pay. Therefore only overtime that was compulsory and guaranteed needed to be included in an employee’s
holiday pay.
However, over the last few years a series of cases in both the European and domestic UK courts have begun to unpick this position. The Court of Justice of the European Union (the “CJEU”) held in Williams v British Airways [2012] that where an element of a worker’s pay could be said to be “intrinsically linked” to the work they are required to carry out under their contract, it should count when determining their “normal” pay for the purposes of determining holiday pay entitlements.
This idea of including elements of a worker’s pay that are intrinsically linked to the work they are required to perform was held by the CJE in the case of Lock v British Gas Trading Limited and other [2014] to include commission. In that case, the commission received by the worker amounted to 60 per cent of his take home pay and therefore not including it in his holiday pay could be seen as a barrier to him exercising his right to paid holiday.
Non-guaranteed overtime
On November 4, 2014 the Employment Appeal Tribunal (EAT) handed down its decision in the conjoined cases of Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Woods and AMEC Group v Law. This decision helps to clarify what the position is in the UK following the Williams and Lock cases.
The EAT held that overtime which a worker is not permitted to refuse, whether it is guaranteed or not, must count as part of their ‘normal pay’ when calculating the pay they should receive on holiday. In these cases before the EAT, it was provided in the employee’s contract that on top of their core contracted hours, they could be required to work an additional number of hours each week as overtime. There was no guarantee that the company would offer the employee these additional hours but if it did, the employee would have to work them.
The EAT did not provide any definitive statement on whether purely voluntary overtime (that which the employer is not obliged to offer and the worker is not obliged to accept) should also be included in holiday pay calculations. However, comments in the EAT’s decision and the direction of travel of the European level decisions would suggest
that voluntary overtime which is regularly worked and intrinsic to the role should be included when calculating holiday pay.
Some possible good news
For any practice owners sitting there thinking they have been incorrectly calculating holiday pay and that their employee’s will be able to claim years of back pay, there was some good news in the judgment. The EAT ruled that where there is a gap of more than three months between holidays taken by an employee this will break the chain
and the employee will not be able to claim for the under payment of holidays beyond that point.
Further good news is that the EAT’s judgment only applies in respect of the 20 days’ annual leave guaranteed by the European Directive, not the additional eight days’ leave which is a purely domestic-driven right. Therefore,
employers could in theory pay a higher rate of holiday pay (that which includes overtime and other payments that are considered intrinsic to the role) for 20 out of their 28-days’ holiday per year, with the remaining eight days being paid at the level it previously was. However, in reality this is likely to prove highly complex and could be
fraught with difficulties.
Conclusion
As the law stands, following these cases, practice owners are best advised to review how they are calculating holiday pay. If there are any payments that are normally paid which might be considered to be intrinsic to the employee’s role, these should be included in holiday pay calculations going forward. If employers take this step they will go a long way to protecting themselves from the tick-tock of that holiday pay time bomb.