This is the first in a series of practical guides on employment law topics relevant to HR Practice. With the holiday season now behind us, the next month will see the outcome of an important appeal on holiday pay.

The Law as it stands in your guide to holiday entitlements:

This is the law as it stands on 1 September 2014. The Working Time Regulations (WTR) sets out the minimum statutory holiday entitlements. This Guide only deals with a statutory holiday. Many employers choose to give over and above the minimum holiday entitlements in their employment contract. As the WTR emanates from an EU Directive, the Working Time Directive (WTD), courts in the UK adopt a purposive approach to give effect to the directive. The purpose of the WTD is to improve “the working environment to protect workers’ health and safety.

1. Entitlement

  • Who is entitled?

Workers and employees have statutory holiday entitlements. The term worker will be used throughout this guide as it covers both workers and employees Workers are those who work personally for a legal entity.

  • What is the statutory minimum entitlement?

The entitlement under the Directive is to 20 days annual leave. The UK Government copper bottomed the Directive with an additional leave entitlement of 8 days, making a total of 28 days paid holiday per holiday year for a full-time employee. Part-time workers have a pro-rata entitlement. There is no automatic right to have a holiday on the bank or public holidays as long as the overall 5.6 weeks minimum is provided. Bank or public holidays can form part of the 5.6 weeks minimum.

Case Law: Neal v Freightliner

This case involved a worker who was contracted to work 35 works per week but was required to work overtime as necessary. His basic pay (base pay) covered his 35 hours per week, overtime and allowances were paid for hours he worked over and above the 35 hours (his variable pay). The question before the Tribunal was whether the employer was entitled to calculate holiday pay as being basic pay only. The Tribunal concluded that holiday pay should be normal pay and include any payments that were intrinsically linked to the tasks carried out by the worker. The Tribunal concluded, adopting a purposive interpretation, that holiday pay should include both base pay and variable pay. This case is currently under appeal and we expect the appeal decision before the end of September. It is my view that the appeal will not succeed and that holiday pay will be interpreted to be normal pay (base pay and variable pay) as averaged over a 12 week reference period, rather than basic pay.

2. Accrual

  • At what rate does holiday accrue?

Leave accrues month by month. It accrues at the rate of 1/12 of the entitlement per month of employment or 2.33 days per month for a full-time worker.

  • What about those with irregular hours?

The courts have adopted a one size fits all approach. The leading case involves oil rig workers who worked for 26 weeks a year. Their entitlement was to 14 days holiday per leave year.

Their work was scheduled with two or three weeks on the oil rig and either two or three weeks off. Time off was called “field break.” The worker’s position was that holiday had to be taken in their employer’s time rather than during a field break. The Supreme Court held that a holiday was a period of “rest and relaxation” and that the employers could insist that holiday is taken in a field break. Holiday, therefore, accrues at the rate appropriately and proportionate to the number of hours actually worked in the week. If those hours vary then averaging the number of hours worked in a particular month will give you the right answer.

  • Does holiday accrue whilst off sick?

Yes, it does! The issue was determined in Stringer v HMRC following a ruling in the ECJ.

  • Does holiday accrue during other periods of absence?

Not formally determined but where the contract is still in existence then accrual will take place. So an employee off on any form of family leave (maternity, paternity, parental for example) will be accruing holiday pay as will those on jury service or study leave.

3. Leave Year

  • When does the leave year run

The leave year runs from the date employment started (the anniversary date) and ends on the next anniversary date. In practice, many employers use the calendar year i.e. 1 January to 31 December and this is permissible provided it is specified in the contract.

  • Can a worker carry over the unused holiday from one leave year to the next?

No, the leave must normally be taken in the leave year it accrued. It cannot be carried forward and it cannot be paid in lieu, subject to the exceptions below.

  • Can an employer allow workers to carry over some unused holiday if it wants to?

An employer cannot permit the first 4 weeks of an employee’s holiday entitlement to be carried forward, subject to the exceptions below. Employers can permit the 1.6 weeks of additional leave to to be carried forward subject to a relevant agreement (normally a contract, handbook or policy) permitting this. Workers cannot insist on being allowed to carry forward the 1.6 weeks additional leave. The default position is to use it or lose it.

  • How does a worker take leave?

The rules are rather prescriptive but a worker has to request permission in advance of when he wants to take it. The employer can refuse permission for any request and can also direct that a worker has to take leave on allocated days for example during a shutdown, or during a notice period.

  • What happens if a worker is off sick whilst on holiday?

Where the holiday has been scheduled by the employer, as it was in Pereda, then the position is that the holiday has to be re-scheduled for when the worker is fit. The situation is not entirely clear where the worker has scheduled the holiday and falls ill during it. Most employers will count that as a holiday rather than sick leave. Whether that is a correct interpretation is a moot point.

  • What happens if the worker is unable to take the leave in the year it accrues?

If a worker is unable to take leave during the year it has accrued then the accrued but untaken leave can be carried forward into the next leave year without the worker specifically requesting the carry forward. This was the Court’s decision in Larner. In that case, the worker was unfit for work due to sickness and could not take the holiday in the leave year it accrued.

  • How long can accrue but untaken leave be carried forward for before it is lost?

Good question! Partially answered in Schulte. Schulte said that a provision that required accrued but untaken holiday to be taken within 15 months after being carried forward was permissible. Therefore in Schulte, any holiday that was not used within 15 months of carrying forward was lost. However, in the case that followed Schulte, Neidel, the Court said that a provision that said that any accrued but untaken leave which was carried forward but not taken within 9 months was impermissible. The position appears to be that an employer can provide for a right to forfeit carried forward holiday where the forfeit period for carried forward holiday is longer than the accrual period. So where the holiday period ends on 31 December 2014, and the employee through sickness has accrued but the untaken holiday of 28 days a clause may be written that carried forward holiday will be forfeited if it is not taken within 13 months of the date it is carried forward.

4. Holiday Pay

  • How much holiday pay is a worker entitled to?

Difficult question. According to the WTR, it is a week’s pay for every week of leave.

  • How is it calculated?

A week’s pay has a very specific meaning and it is the one given at section 220 onwards of the Employment Rights Act. The recent caselaw in effect suggests it is wrong to rely on the ERA definition of a weeks pay. Caselaw coming from Europe suggests that holiday pay should be “normal pay” and include any pay that is “intrinsically linked” to the work done. There is no issue of calculation where a worker is only paid basic pay. Where a worker receives basic pay and variable pay like allowances, commissions and overtime, the overarching principle is that the worker should not b e worse off financially for taking holiday

  • What’s included?

A commission can be included. Where the commission is payable as a large part of the overall remuneration than average commission should be included, following Lock v British Gas. Allowances can be included following the case of Williams v BA. Overtime may very well be included following Freightliner v Neal. This case is being appealed but the direction of travel is clear that a worker should not be any worse off financially by taking holiday as this would contravene the purpose of the Working Time Regulations by imposing a financial disincentive to take leave, thus not ensuring workers have adequate time off.

  • Rolled up holiday pay 

Rolled up holiday pay is not allowed as it acts as a disincentive to taking holiday. However, if an employer does pay rolled up holiday pay they may be able to off set the rolled up holiday pay paid against their liability to pay holiday pay. The situation is not clear and advice should be sought.

5. Claims:

  • Can a worker claim bring a claim for holiday pay?

A worker can claim holiday pay if either he has not been paid holiday pay or the amount he has been paid has been incorrectly calculated. The claim can be brought in the Employment Tribunal as an unlawful deduction claim. The claim must be brought within three months of the last deduction. A claim could also be brought in the County Court for amounts underpaid in the 6 years prior to the claim being issued.

  • How much can be claimed?

Claims can be brought for underpayments going back to the date of the first underpayment which if it relates to an incorrect calculation of holiday pay could date back to 1998, when the WTR was introduced or when the first incorrect calculation in the series was made.

  • Can interest be claimed?

No according to the first instance decision in Neal v Freightliner.

6. Practical Steps:

There are several things you can do:

  • Review contractual documentation. – Ensure that you have the right to do the following:
  • Require that holidays can be taken on specific days and dates.
  • Have clear rules when carried forward holidays can be forfeited, more than 12 months after they were first carried forward.
  • Deduct overpaid holiday pay from employees’ final pay.
  • Consider whether holiday pay has been calculated to include variable pay.
  • If it has not been calculated to include variable pay consider whether further legal advice is necessary and whether any liabilities are potentially being stored up.

That just about sums up everything you need to know about your rights as an employee concerning your holiday entitlement, for further assistance contact one of our friendly, highly skilled solicitors.