The current position in respect of calculating holiday pay could cause widespread financial damage at a time when housing providers are under increased pressure to demonstrate value for money, one way of which is through saving costs. In particular, housing providers are more frequently expecting workers to be on-call for emergency housing repairs, perhaps to assist with delivering high tenant satisfaction, or are including performance related pay or productivity bonuses as a way of retaining and motivating the workforce.

However, how far should the decision lead you to change the approach to the calculation of holiday pay where overtime, premium payments and commission may be paid to your workforce?

Under UK law, a worker is entitled to 5.6 weeks' (28 days) annual leave in each leave year, made up of 4 weeks' EU entitlement and an additional 1.6 weeks' granted by UK law. On top of this, it is not uncommon for housing providers to allocate further days of holiday on a contractual basis to employees. Whilst legislation confirmed that holiday pay should be based on a week’s pay, it did not historically set out what should be included within that payment. UK law was therefore at a point where workers were paid based on a week’s ‘normal remuneration’. Overtime and commission were not historically viewed, and therefore not calculated, as part of ‘normal pay’ for a worker.

The case of Bear Scotland v Fulton changed this. It is now accepted that ‘normal remuneration’ can include payments for overtime which a worker is required to work, but which an employer is not obliged to offer. Further, and more importantly, overtime should also be taken into account when calculating a week's pay when payments for such overtime form part of ‘normal pay’.

As the decision impacts most upon those who have normal working hours but receive a variation in their pay, perhaps because of the type of work carried out or where they work more than their contacted hours, it is crucial to determine what is regarded as ‘normal pay’ to ensure the correct and consistent approach to the treatment of such payments. The impact of the decision turns on the assessment of whether the work is regarded as:

  • guaranteed compulsory work (where any payments for that work, including overtime pay, commission or bonus earned, must form part of the holiday pay as these payments are regarded as normal remuneration and intrinsically linked to the performance of the tasks which the worker is required to carry out);
  • non-guaranteed compulsory work (where any payments for that work, including overtime pay, commission or bonus earned, must form part of the holiday pay, but the calculation is dependent on the reference period the employer chooses);
  • voluntary additional work (where overtime payments should be included in holiday pay when that overtime forms a ‘settled pattern’ for workers, or when payments are made to workers so frequently that it could be deemed to form part of normal pay; or
  • sporadic overtime arrangements with no regular pattern (where it is possible to argue that payments are not settled, nor regular and therefore should not be included).

It will also be worth assessing whether there has been a break of more than three months between successive underpayments, potentially limiting back-pay liabilities.

On the back of the judgment therefore, going forward, it will be important to give careful consideration to the individual circumstances of overtime, on call or bonus payments made to consider whether your holiday pay arrangements could come under close scrutiny. Whilst it is anticipated that Regulations from the government are likely to limit underpayments to the last two years, these Regulations are not expected to come into force until 1 July 2015 and immediate action is advisable.

For more information

Contact Kate Watkins.

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