Calculating holiday pay can be complex, particularly given recent legislative updates and evolving case law. This article outlines the key starting points, legal changes, and practical considerations businesses need to be aware of when determining holiday pay entitlements.
Employers should first understand the legislative framework that underpins holiday entitlement in the UK. The Working Time Regulations 1998 continue to form the basis for determining statutory holiday leave and pay, distinguishing between core leave entitlements and additional leave allowances.
These regulations define the minimum amount of paid annual leave a worker is entitled to.
Recent legislative changes, introduced through the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, have clarified what should be included in holiday pay calculations under the WTR.
These regulations provide important detail on how to calculate a week’s pay and what must now be included in the calculation of holiday pay under Regulation 13.
Payments are EITHER intrinsically linked to the performance of tasks under the contract OR regularly paid to the worker in the previous 52 weeks. There is no need for these payments to have been both intrinsically linked to the work and regularly paid to form part of holiday pay. Dudley Metropolitan Borough Council v Willetts [2018] ICR 31 (EAT).
One area of uncertainty has always been the extent to which an annual bonus (whether for individual or company performance or a combination of factors) should be included in the holiday pay calculation.
It has previously been argued that an annual bonus that is only paid once in each 52 week period cannot be said to be regularly paid in the 52 weeks prior to the holiday, as ‘regularly’ implies more than once in that period. However, as regulation 16(3ZA) does not require a payment to be both regularly paid and intrinsically linked to tasks required to be performed under the contract, an annual bonus would qualify to the extent that it was intrinsically linked to tasks performed under the contract even if it was not regularly paid.
Prior to the 2023 regulations coming into force, these legal questions were answered by analysing the caselaw pre-1st January 2024, which still provides helpful guidance.
Various ECJ and domestic cases including Lock v British Gas Trading, Bear Scotland Ltd v Fulton and East of England Ambulance Service NHS Trust v Flowers held that normal remuneration could include the following:
In particular, the relevant principles to be applied were:
In relation to productivity or performance bonuses, an Employment Tribunal held in the case of Wood and others v Hertel (UK) Ltd and another ET/2603803/12 that employees were entitled to argue that an incentive bonus arrangement was part of normal pay. The test whether the payment was ‘intrinsically linked’ to the performance of tasks the workers were required to perform did not require it to be exclusively so. Therefore a bonus that depended on team rather than individual performance was potentially within scope. This decision was not appealed.
Annual bonuses, as already alluded to above, were a notorious grey area because some commentators said that provided the bonus received was unaffected by the taking of holiday, the worker would already have received the relevant bonus payment for the holiday period. Conversely, where bonuses were linked to performance, there was a risk that a worker who took less holiday may perform better and achieve a higher bonus. In that case, the principles set out in Lock would be engaged and the holiday pay would include bonus.
In response to the changes, employers may adopt different strategies to ensure compliance. This section outlines common options and considerations for businesses in managing holiday pay.
Possible approaches that a business may take in light of the changes effected by the 2023 regulations where Regulation 16(3ZA) applies, are as follows:
The first option is clearly the safe approach that avoids the risk of breach even though it is at greater cost to the business (who could perhaps take this into account when setting salary and bonus levels for their staff).
Additionally, a business may also consider linking the payment of bonus to the performance of the business rather than the individual to avoid the annual leave being included in the holiday pay calculation.
Our specialist employment solicitors are available to guide you through this complex area and advise you swiftly and decisively when problems arise.
For further information please feel free to contact Rachel Lester, Head of Employment, on +44 (0)7394 802375 and at Rachel.Lester@ilaw.co.uk.
