knowledge 20 June 2019 |

The Real Cost of Holidays: Recent Developments Regarding Holiday Pay

While that decision does not bind the courts in the Republic of Ireland, the proper calculation of holiday pay has increasingly become a cause for concern amongst employers on both sides of the border, as a growing body of case law indicates that calculating holiday pay based on basic pay only is not compatible with European law. The calculation is now properly understood to be based on “normal remuneration”, though exactly what comprises normal remuneration is a question of fact and degree and employers may be surprised to learn that it could potentially include variable elements of pay such as commission, overtime and even bonuses.

The European dimension

While the Working Time Directive (the “Directive”) does not indicate how holiday pay should be assessed, EU case law has established that, in respect of the four-week period of annual leave granted under the Directive, “normal remuneration” should be taken into account when calculating holiday pay. The Court of Justice of the European Union (“CJEU”) stated in King –v- Sash Windows that the right to annual leave is a fundamental principle of EU social law and workers faced with uncertainty regarding remuneration will not be able to fully benefit from the leave and may be dissuaded from taking it. As such, any practice or omission which may have such a deterrent effect is incompatible with the purpose of paid annual leave.

In Williams –v- British Airways plc, the CJEU indicated that workers must receive their “normal remuneration” for the period of leave granted by the Directive and that this would include payments which were “intrinsically linked” to the performance of the tasks required under the contract of employment. The CJEU later applied this line of reasoning in Lock –v- British Gas Trading Limited where it held that a sales consultant’s commission payments should be taken into account when calculating holiday pay under the Directive as these were directly and intrinsically linked to the performance of the tasks required under his contract of employment as a salesman. It stated that all components of total remuneration relating to the professional and personal status of the worker (rather than components intended to cover occasional and ancillary costs) must continue to be paid during annual leave, including allowances relating to seniority, length of service and professional qualifications. The Irish Labour Court had come to a similar conclusion in relation to commission almost ten years previously in Smart –v- Hidden Hearing.

In a recent case on the topic, East of England Ambulance Service NHS Trust –v- Flowers, the Court of Appeal for England and Wales confirmed that the Directive requires voluntary overtime to be included in holiday pay if the pattern of work is “sufficiently regular and settled for payments made in respect of it to amount to normal remuneration”. This followed the decision in Hein –v- Albert Holzkamm GmbH in which the CJEU held that pay for regular rostered overtime should be included in the calculation of holiday pay where the overtime is required to be worked “on a broadly regular and predictable basis” and the corresponding pay constitutes “a significant element of remuneration”. This reflected the broad principle that for the duration of annual leave, remuneration must be maintained.

Domestic law

Under Irish domestic law, the Organisation of Working Time Act 1997 provides that the pay in respect of an employee’s annual leave shall be at “the normal weekly rate, or, as the case may be, at a rate which is proportionate to the normal weekly rate”. Further detail concerning the “normal weekly rate” is contained within the Organisation of Working Time Act (Determination of Pay for Holidays) Regulations 1997 (the “Regulations”), however, the Regulations expressly exclude “any pay for overtime”. The Regulations are clear, therefore, that payments in respect of overtime are not reckonable for the purposes of calculating holiday pay. However, employees could advance an argument based on the European line of authority that this exclusion is inconsistent with European law and can, therefore, be disregarded by the WRC or Labour Court following the CJEU decision in Minister for Justice –v- Workplace Relations Commission.

Comment

It should be noted that the requirement to include overtime only applies to the four weeks’ annual leave entitlement granted under the Directive and, as such, contractual holiday entitlements in excess of this are outside the scope of this line of authority, presuming there is nothing to the contrary contained in an employee’s contract of employment. However, employers may consider it unfeasible for the purposes of calculating holiday pay to distinguish additional holiday pay from the four week’s annual leave granted by the Directive for the purpose of assessing which overtime might fall outside the Directive’s parameters.

In order to comprise normal remuneration, it can comfortably be speculated that payments would have to be received in the regular course of events and for a sufficient period of time. Determining the exact parameters of normal remuneration will involve a fact-sensitive inquiry and it can be expected that the WRC and the Courts will consider all the circumstances when determining whether certain payments amount to holiday pay. However, it is possible based on the emerging principles that such payments as standby payments, shift allowances and even certain bonus payments could fall within the ambit of normal remuneration. However, where the bonus is characterised as discretionary in nature, varies from year to year, and is based on both company and individual performance, a characterisation as “normal remuneration” may not be sustainable.

Redress

Employers who are not compliant with these requirements may face a claim for unlawful deduction from wages under the Payment of Wages Act. Such a claim would need to be brought within six months of the date of the contravention, albeit that if there is an unbroken series of such underpayments employees could potentially claim for the entire series. More broadly, the lawfulness of the six-month limitation period could be called into question under EU law.

While recommendations under the Industrial Relations Acts are not binding on employers, the Labour Court has recommended on a number of previous occasions that regularly rostered overtime should be reflected in holiday pay.

Concluding remarks

Considerable uncertainty remains regarding the proper scope of “normal remuneration” upon which holiday pay should be based, yet the Court in the recent PSNI case was critical of the organisation for persisting in calculating holiday pay by reference only to basic pay. As such, employers should act carefully where only contractual rather than “normal” remuneration is maintained during periods of annual leave.

The Employment, Pensions and Incentives Group at McCann FitzGerald has significant experience of advising clients in relation to the proper calculation of holiday pay. Your usual contact would be pleased to provide further information.