Holidays and holiday pay

All workers are entitled to a minimum of 5.6 weeks’ paid holiday a year (equivalent to 28 days for someone who works a five-day week) under the Working Time Regulations (WTR). The original right to four weeks holiday was increased to 4.8 weeks in October 2007, and from 4.8 to 5.6 weeks in April 2009, as a result of union campaigning. Four weeks of the holiday entitlement are based on European law (the Working Time Directive). The extra 1.6 weeks are based on UK legislation. The government has been consulting, as part of its Modern Workplaces consultation, on allowing employees and employers to agree to “buy out” the extra 1.6 weeks of leave that exceed the requirements of the Directive. “Buying out” the core four-week leave entitlement under the Directive would be unlawful. The government response to this aspect of the consultation is still outstanding.

There is a ready reckoner for calculating holiday entitlement at: www.gov.uk/calculate-your-holiday-entitlement.

The right to paid annual leave is available to all workers, not just employees (see Chapter 2: Categories of worker). Under the statutory scheme, holidays must be taken in the year they accrue, unless the employment contract allows untaken leave to be carried forward into the next holiday year. The position is more complicated where a worker has been unable to take holiday due to sickness absence (see page 119).

The right to paid holidays is an important EU social right, from which there can be “no derogation” (KHS AG v Winfried Schulte Case C-214/10). In other words, national law is not allowed to cut down the statutory right to paid holidays, or make it too difficult for the worker to enforce their rights in a tribunal. The basis of the right is that workers’ health and safety must be protected through adequate rest.

The right to four weeks’ paid annual leave under the Working Time Directive has “direct effect” (Dominguez v Centre Informatique du Centre Ouest Atlantique [2012] IRLR 321). This means that public sector employees can enforce the Directive directly against their employer in the employment tribunal, regardless of any more restrictive wording in the Working Time Regulations. In claims by private sector employees, the tribunal must give effect to the Directive, by adding or substituting words if necessary (NHS Leeds v Larner [2012] EWCA Civ 1034).

Because the right to paid annual leave is intended to protect workers’ health and safety by ensuring they take adequate rest, a worker is not allowed to be paid in lieu of taking statutory holidays, except where the employment has ended. The right to be paid for unused statutory holiday at the end of the employment is absolute, and any contract term that seeks to deny it is void (Witley & District Men’s Club v Mackay EAT/151/00 [2001] IRLR 595).

In Podlasiak v Edinburgh Woollen Mill Limited ET/2701291/13, an employment tribunal ruled that a contract term that provides for a nominal payment such as £1, in lieu of holiday outstanding on termination, is a breach of the Working Time Directive, even in cases of summary dismissal for gross misconduct.

The rules are different for unused contractual holiday pay. Employers and employees are allowed to agree their own rules for contractual holiday (i.e. holiday exceeding the statutory minimum). A worker is only entitled to pay in lieu of unused contractual (as opposed to statutory) holiday if the contract allows this. Normally this takes the form of an express contractual term, although in some circumstances the tribunal may imply a term (Janes Solicitors v Lamb Simpson EAT/323/94).

The purpose of statutory holiday is to protect health and safety — the need for workers to take adequate rest (Pereda v Madrid Movilidad SA [2009] IRLR 959) but the Working Time Directive is not concerned with the “quality” of rest periods. “A rest period is simply any period which is not working time” (Russell v Transocean International Resources Limited [2011] UKSC 57).

Pay during holidays is calculated in the same way as a normal week’s pay (sections 221 to 224 of the ERA 96).

There have significant positive developments in relation to the calculation of holiday pay, as a result of strategic, union-backed litigation. The key case is a landmark European Court of Justice ruling in Williams v British Airways ECJ C155/10, which returned to the Supreme Court in 2012 (British Airways v Williams [2012] UKSC 43). In this test case by members of pilots’ union BALPA, the ECJ has confirmed the under the Working Time Directive, a worker must receive “normal remuneration” when taking statutory holiday, and that holiday pay should be “comparable to periods of work”.

Holiday pay should include any aspect of normal pay that is “linked intrinsically” to the performance of the tasks workers are required to carry out under their employment contract, said the ECJ. Express contract terms limiting statutory holiday pay to “basic pay only” are likely to breach the Directive, following this ruling.

Following the ECJ judgment, an employment tribunal has ruled, in a case brought by the RMT, Neal v Freightliners Limited ET1315342/2012, that statutory holiday pay should take into account voluntary as well as compulsory overtime, weekend working and shift premiums. The same result was reached in another tribunal decision in Scotland — Fulton & Baxter v Bear Scotland Limited, unreported, 2013. However, a Liverpool tribunal reached the opposite conclusion in Elms v Balfour Beatty Utilities Solutions Limited, concluding that voluntary overtime need not be included when calculating holiday pay. All three cases are under appeal.

Where pay depends on output, for example, where there is a variable contractual bonus linked to productivity, holiday pay must be calculated taking the bonus into account, averaging the pay over the preceding 12-week period (May Gurney v Adshead & 95 others EAT/0150/06).

The test case of Lock v British Gas Trading Limited C-539/12, brought by public services union UNISON in the ECJ, takes this a step further. The case concerns holiday pay for workers whose pay is based on commission, but the outcome of the case could affect any worker whose regular wages vary according to output. In this case, the Advocate-General (AG) to the European Court of Justice has delivered a formal Opinion saying that holiday pay for commission workers should reflect not just the worker’s actual sales, but also the sales that he would have made if he had not been on holiday. Otherwise, the financial cost of taking leave deters commission-based workers from taking holiday, and this is a breach of the Directive. British Gas argued that its annual commission rates are already adjusted to account for lost sales during the holiday period, but the AG said that this, if true, would amount to paying “rolled-up holiday pay” which is itself unlawful (see below). The AG’s Opinion, although not binding, is usually followed by the ECJ.

It is unlawful to pay holiday pay as part of the hourly rate of pay. The practice, known as rolled-up holiday pay, breaches the Working Time Directive which requires that workers are paid for their holiday at the time that they take it (Robinson-Steele v RD Retail Services Ltd, Clarke v Frank Staddon Ltd and Caulfield & others v Hanson Clay Products Ltd (formerly Marshalls Clay) C-131/04 and C257/04 [2006] IRLR 386).

In Leisure Leagues v Maconnachie [2002] IRLR 600, the EAT held that the amount of a day’s holiday pay should be calculated by dividing the annual salary by the number of days actually worked (in that case, 233) rather than by 365, which was the previous practice. This was to take into account good industrial practice and the introduction of the Working Time Regulations. This was confirmed by the EAT in Yarrow v Edwards Chartered Accountants [2007] UKEAT 0116/07/0806.

Holiday rights accrue on a monthly basis. In the first year, a worker is entitled to a twelfth of the statutory annual leave entitlement for every month worked. The amount of time that can be taken at any one time within the first year of work can be rounded up to the nearest half a day. For example, someone working five days a week who has worked for two months would be entitled to take three-and-a-third days, and so could take three-and-a-half days’ leave.

Under the statutory scheme, workers wanting to take leave must give notice of at least twice the length of the holiday requested. This requirement can be varied by the terms of an employment contract or collective agreement, but the conditions imposed by the employer for taking leave must not be “unreasonable, arbitrary or capricious” (Lyons v Mitie Security UKEAT/0081/09).

The employer is allowed to ask for leave to be deferred, as long as the employer tells the employee in advance, giving notice which is at least as long as the leave requested. Shorter notice can be given where there is a “relevant agreement”. A term in the employment contract entitling the employer to require the employee to take holiday during their notice period can be a “relevant agreement” for this purpose (Industry & Commerce Maintenance v Briffa UKEAT/0215/08/CEA).

If an employer refuses to pay for statutory holidays, a worker can bring a tribunal claim. A worker can choose between a claim for breach of the WTR or claiming outstanding holiday pay as an unlawful deduction from wages (HM Revenue and Customs v Stringer [2009] IRLR 677). The advantage of a claim for unlawful deduction from wages is that a continuing series of deductions need only be the subject of one claim, rather than a claim for each time pay was docked.