Instead of sitting it out and waiting for the courts to decide what to do about holiday pay, employers should consider taking pre-emptive action and changing the way they remunerate workers now.
A series of recent judgments relating to the way that holiday pay is calculated have cast doubt on some of the methods used by some employers - particularly those that employ workers who are paid on an hourly basis. In Lock v British Gas Trading, for example, the European Court of Justice (ECJ) concluded that holiday pay must be calculated based on an employee's normal pay, including any commission or over time they might have expected to earn during their time off.
Despite this ruling, some important questions remain for employers. For example, the Working Time Regulations make it clear that employers need to pay more holiday pay to employees who are contracted to work over time than to those who work over time voluntarily or on a non-contractual basis but the courts have demonstrated that they disagree with the legislation which states that they should calculate holiday pay differently depending on whether it is voluntary or contractual overtime. This has resulted in some decisions from the Judges which appear to be at odds with the legislation. Unfortunately, the Government has indicated that they will not be amending the Working Time Regulations despite the Courts being at odds with the rules.
The uncertainty surrounding holiday pay calculations is leading most employers to wait for legal clarification.
There have been a lot of scare stories around about the potential impact of the changes affecting the way holiday pay is calculated - in particular, the potential cost of back-dated claims for holiday pay, which could go back as far as 1998. To reduce the impact of the Courts potentially deciding that claims can be back-dated this far, employers may decide to take pre-emptive action now.
Hourly-paid workers should be able to enjoy holiday pay based on what they have actually worked. A number of pending Employment Appeal Court (EAT) hearings could make this a case law requirement soon anyway.
Acting now also gives employers a chance to strengthen goodwill ahead of any legal changes and this could help to minimise any liability they might face if back-dated claims are subsequently pursued.
Businesses that hire more workers paid on an hourly basis, including those on zero-hours contracts, are especially exposed to this potential liability for holiday pay underpayment. These include retail, leisure, transport, construction and warehouse companies, for example.
In the case of zero-hours contracts and some other flexible employment contracts, employers can avoid any potential liability for the underpayment of holiday pay by ensuring that workers do not exceed those of a full-time worker (usually 39 hours per week).
The current lack of clarity surrounding holiday pay calculations is concerning for a large number of employers and, according to Shakespeares, matters could have been made easier if the Government had opted to amend the Working Time Regulations instead of leaving the matter to be determined by the courts.
It is a shame that the Government didn't decide to intervene to amend the Working Time Regulations, which have been in place since 1998, and bring them up to date. This would have been welcomed by employers because calculating holiday pay has become notoriously difficult in recent years because case law is no longer consistent with the literal wording of the law. The Government's failure to act to simplify the wording of the regulations has added to this difficulty.
Paula Whelan is head of employment law at Shakespeares