The calculation of holiday pay is an area of employment law that has recently undergone significant changes, and further modifications are anticipated as this matter continues to be considered by the Employment Tribunal.
So, with all of these changes in mind, what exactly should employers be considering when assessing the level of holiday pay that their employees are entitled to?
It has long been established that employees are entitled to be paid their 'normal remuneration' during periods of annual leave; however, it is unclear as to what exactly constitutes 'normal remuneration'.
Case law has established that, for the purposes of calculating holiday pay, a payment will be considered to form part of an employee's normal remuneration where it is intrinsically linked to the work that the employee is contractually obliged to perform, and the much publicised Bear Scotland (2014) case provided some guidance as to the types of payments that should be considered 'normal remuneration'.
It is currently accepted that the following payments should be included when calculating holiday pay for staff:
- Commission payments.
- Guaranteed and non-guaranteed overtime payments.
- Attendance, performance and productivity bonuses (if, however, a bonus is based on service performance or departmental performance rather than individual performance it will not be required to be included in calculations, unless taking holiday will negatively affect the bonus payment).
- Standby and emergency call-out payments.
- Acting-up payments.
- Allowances that go beyond mere repayment of expenses and are more akin to a bonus (for example, travel allowances based on notional travel time).
However this list is by no means definitive, and further changes to the calculation of holiday pay are likely in the coming months. Most notably, the English Employment Tribunal has not yet decided whether entirely voluntary overtime (that is, overtime which an employer is not obliged to provide and an employee is not obliged to accept) should be considered to form part of a worker's 'normal remuneration', though the recent case of Patterson v Castlereagh Borough Council (2015), decided by the Northern Ireland Court of Appeal, held that voluntary overtime could be included when calculating holiday pay.
Unfortunately the Northern Ireland judgment simply establishes that it is possible in principle for voluntary overtime to be included in holiday pay calculations, and does not provide any definitive guidance as to the circumstances in which voluntary overtime will satisfy the test for 'normal remuneration'. The issue of whether the voluntary overtime in the particular circumstances of the Patterson case has been referred back to the Employment Tribunal in Northern Ireland, and it is hoped that the resulting judgment will provide some useful practical guidance.
Although judgments of the Northern Ireland Court of Appeal are not binding on English Tribunals, given the current lack of clarity in this area any such judgment is likely to be persuasive within the English legal system, and is a strong indicator that the law will be extended so that payments for wholly voluntary overtime will need to be included in holiday pay calculations.