Employment and Immigration Law Update - Calculating holiday pay


30 July 2020

The Employment Appeal Tribunal (EAT) has considered whether a profitability bonus should be included in the calculation of holiday pay under the Working Time Regulations (WTR) 1998.

Econ Engineering Ltd v Dixon and others [2020] UKEAT/285/19

Facts

The employees of the company all received a monthly profitability bonus, based on their individual hourly rate for the number of hours worked each month and dependent on company profit above a certain target. If the target was not met, no bonus was paid to the staff for that month.

The claimants argued that this bonus payment should be included in the calculation of their holiday pay under the WTR 1998. Their claim for unlawful deductions from wages was upheld by an employment tribunal. It decided that the profitability bonus should be included in the calculation of the claimants’ holiday pay, under both Regulation 13 (four weeks’ minimum holiday as required by the European Working Time Directive (WTD)) and under Regulation 13A (additional 1.6 weeks’ holiday provided under the WTR 1998). The respondent appealed to the EAT in respect of the Regulation 13A holiday pay.

EAT decision

The EAT upheld the respondent’s appeal. It agreed that pay for the 1.6 weeks’ holiday under Regulation 13A had to be determined in accordance with the calculation of a week’s pay under the Employment Rights Act 1996. This provides, for workers with normal working hours and whose pay does not vary with the amount of work done, that a week’s pay is the amount payable for the employee’s normal working hours. According to the EAT, this means sums legally payable when the employee has worked their normal working hours in a week. As the bonus payment was also contingent on the company meeting its profitability target, an employee working their normal hours was not sufficient on its own for payment to arise. This meant that the bonus did not count towards a week’s pay for the purpose of calculating holiday pay.

Consequences

This decision illustrates the distinction in calculating holiday pay for the purposes of WTD holiday and additional WTR holiday. The minimum four weeks’ holiday required under the WTD has to be calculated on the basis of ‘normal remuneration’ in accordance with EU law. This can include bonuses if they are intrinsically linked to the performance of tasks required under a contract of employment (which the employer conceded was the case here). Holiday pay for the additional 1.6 weeks of leave under the WTR can be based on normal weekly pay, excluding additional payments such as bonuses and overtime.

These articles are from the July 2020 issue of Employment and Immigration Law Update, our monthly newsletter for HR professionals. To download the latest issue, please visit the newsletter section of our website. For further information please contact Liz Stevens or another member of Birketts' Employment Law Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2020.