Case law on holiday pay

[2019] EWCA Civ 1402

Issue: Holiday pay – zero hours and irregular hours workers

This case predates a change to holiday pay averaging periods from 12 to 52 weeks that came in on 6 April 2020 but the principles in the case still apply.

A music teacher worked during term times for the Harpur Trust. She was on a permanent contract but was only paid for work done. During the school holidays she had no work from the trust. She usually worked 32 weeks a year over three terms.

Her employer paid holiday entitlement of 12.07% to the term-time only staff. This was calculated in accordance with the ACAS booklet 'Holidays and holiday pay' which suggested this percentage for calculating the pay of casual workers. The organisation calculated her earnings at the end of each term and paid her one-third of 12.07% each term. (This standard calculation is based on 5.6 weeks’ holiday, divided by 46.4 weeks. The music teacher got 19.3 days’ holiday, or 32/46.4 x 5.6 weeks = 3.86 weeks of leave).

Brazel brought a tribunal claim for unlawful deductions from her wages because of underpayment of holiday pay through not paying the full 28 days (5.6 weeks) of holiday pay. The case attracted the support of teachers’ unions keen to help other workers also not paid for part of the year.

Decision

The Court of Appeal decided that such workers are entitled to a minimum of 28 days’ annual leave which should be paid at the rate of a week’s pay and, if this is irregular, then the average over the previous 12 weeks.

Implications

This decision affects hundreds of thousands of employees working with irregular hours or patterns, or on zero hours contracts.

Permanent workers on a part-year contract, such as term-time only, should not have their 5.6 weeks’ statutory holiday entitlement under the Working Time Regulations pro-rated to reflect the fact that they do not work for the full year. All workers are entitled to a minimum of 28 days’ paid annual leave, even if they do not receive work or pay for parts of the year. The WTR make no provision for pro-rata calculations. The regulations simply require a week's pay to be identified and multiplied by 5.6.

Employers who have been using 12.07% of earnings as a basis for the calculation of holiday pay for casual workers should stop using this method. The holiday must be paid at the rate of a normal week’s pay or, if pay is irregular, it should be based on the average payment for the preceding 52 weeks instead (the averaging period for variable workers increased from 12 to 52 weeks from 6 April 2020).

Zero hours workers are entitled to holiday pay and should be paid their usual hourly rate multiplied by 5.6. Employers can use the government’s Calculate holiday entitlement tool for this.

​​Issue: Calculating holiday pay - commission

This important case concerns the inclusion of commission in holiday pay calculations. A sales consultant working for British Gas earned a basic salary plus commission on sales which produced around 60% of his total income. Obviously whilst on holiday he could not make sales (and therefore generate commission). He suffered a significantly reduced income after every holiday as there was no commission coming in. He claimed for unpaid holiday pay. His employers argued that:

• employees continue to receive commission already earned which fall due during the holiday period
• the sales targets took into account holiday periods
• the rates of commission paid took into account the fact that workers would not earn commission during holiday periods.

The Leicester employment tribunal referred the case to the European Court of Justice (ECJ) for a preliminary view on whether commission should be included as part of a holiday pay calculation and if so, how the commission should be calculated.

The ECJ rejected the employer's arguments and found that holiday pay should include commission. The holiday pay of workers should comprise both basic pay and an amount that reflects the average commission earned over a previous representative period. The ECJ did not suggest how employers should actually calculate holiday pay to include the average commission, although a reference period of 12 months was mentioned. The ECJ left that issue for the UK courts to decide.

The case finally reached the Court of Appeal (CA) which held that the Working Time Regulations 1998 (WTR) should be interpreted to include commission payments in holiday pay calculations in respect of the four weeks’ annual leave under the EU Working Time Directive (WTD).

The CA decided that the WTR can be interpreted to provide this employee with holiday pay calculated by reference to his normal remuneration. However there was no real guidance on how holiday pay should be calculated taking into account ‘results-based’ commission. A further appeal to the Supreme Court is expected.

Implications for employers

• The Working Time Regulations 1998 give a right to 28 days paid annual leave.
• The Employment Rights Act 1996 specifies that workers holiday pay is equivalent to their normal weekly salary.
• Previously, annual leave pay in the UK was thought not to include any commission that would have been earned were it not for taking holiday.
• Workers and employees now appear to be entitled to have overtime, results-based commission, some bonuses and extra shift payments counted towards their holiday pay.
• Employers who pay using commission structures now need to start considering the risks of not calculating commission in respect of holiday periods.
• There have now been several other relevant cases including Williams and others v British Airways plc,Neal v Freightliner Ltd and May Guerney Ltd v Adshead and Bear Scotland Limited v Fulton and others (and conjoined cases). The clear trend in these cases is that holiday pay should include other payments such as commission or overtime which are ‘intrinsically linked’ to the performance of the workers' tasks.
• Results-based commission like that in this case should now be taken into account in holiday pay. However there is likely to be a final appeal to the Supreme Court which may produce guidance on the mechanics of how holiday pay is in fact calculated.
• The obvious way to calculate commission based holiday pay is to look back at average pay over a reference period. The ECJ has suggested 12 months, but the original tribunal in this case suggested holiday pay could be calculated over a 12 week reference period.
  
• Results-based commission should be included in holiday pay, although differently structured commission schemes and bonus schemes which are not so directly linked to work and results may not have to be included.
  
• Attendance bonuses will also be deemed part of the entitlement for normal working hours and should be taken into account when calculating holiday pay.
• To be included, any payments such as overtime and extra shifts must be 'intrinsically linked' to the performance of the tasks required under the contract of employment.
• Commission, overtime, bonuses etc may only have to be taken into account when calculating his holiday pay in respect of the four week minimum holiday period required by the Directive rather than the full 28 days paid leave available in the UK.
• Employers should consider the 'knock on' effect of regular overtime, commission, bonuses and extra shift payments or other payments. If staff do work which is ‘intrinsically linked’ to the performance of their contractual tasks these should probably be included when calculating holiday pay.
• Some workers may be in a position to bring retrospective unpaid wages claims and employers will face significant outlay and sacrifice much management time resolving issues, although the subsequent Bear Scotland case suggests that in many cases a three month time limit will apply.
• At the very least employers may contemplate changing commission structures where they are contractually able to do so.
• The government previously supported the claim that holiday pay should include results-based commission. This would implement the WTD. Following a departure from the EU, there will be increased scope for changing the WTR, but the government has said that there will be no immediate changes to workers rights, so it seems likely that commission will continue to be included in holiday pay.
• The government may further clarify the position in legislation, rather than waiting for piecemeal tribunals and court decisions.

[2015] NICA 47

Issue: There is no reason is principle why voluntary overtime should not be included in holiday pay

This case confirms that voluntary overtime should be included for the purposes of calculating holiday pay, at least in Northern Ireland.

A Council employee alleged unauthorised deduction from wages in relation to holiday pay under two concurrent contracts, as overtime he had undertaken had not been taken into account. The employer said that any overtime was not compulsory, but was entirely voluntary.

The Northern Ireland Court of Appeal (NICA) indicated that the Working Time Directive may require voluntary overtime to be taken into account when calculating holiday pay, although it was a cautious decision based on the particular circumstances of the case.

Implications for employers

• This case from the Northern Ireland Court of Appeal does not bind English courts, but provides guidance and is in line with other important cases dealing with other aspects of ‘extra pay’ such as commission, namely Bear Scotland Ltd and Lock. 
• Voluntary overtime should be included when calculating an employee's holiday pay (although each case will turn on its own facts). 
• Workers should not face disincentives which may make them reluctant to take their holiday.
• If a worker expects a certain level of pay as normal, then they should receive that during their holiday period. 
• It will be a question of fact for each tribunal to determine if voluntary overtime was normally carried out by the worker and has become a permanent feature of the remuneration. 
• The more regular overtime is, then the more likely that the employee has come to expect overtime as normal. 
• Employers should include overtime in holiday pay calculations for the basic minimum four weeks' leave granted under the Working Time Directive, especially where overtime is guaranteed, required or regularly worked. However they need not do so for the extra eight days holiday afforded to them by British law. 
• Other cases have indicated that normal overtime (which is not guaranteed but which employees are contractually obliged to work) should also be included in the calculation of holiday pay. 
• Appeals are expected in the other key cases namely Lock and Bear Scotland which may provide further guidance..

UKEAT/0057/14
Issue: Untaken leave​

A self-employed commission only salesman had his contract terminated by his employer. He had worked there for 13 years but the employer ended the relationship when he reached the age of 65. He claimed age discrimination and also 24 weeks unpaid holiday leave over a 13 year period as such holiday was not taken due to it being unpaid.

He won his case for age discrimination but the key issues reaching the Employment Appeal Tribunal (EAT) included whether he had any entitlement to payment in lieu for untaken holiday going back a number of years.

The EAT confirmed that the minimum holiday entitlement under the Working Time Regulations 1998 may only be taken in the applicable leave year. Payment in lieu may only be made where a worker's employment is terminated. The EAT agreed that, in principle, workers could carry over untaken holiday if they were prevented from taking such leave due to reasons beyond their control. The EAT found in this case that there was insufficient evidence for the employment tribunal to decide if he had been prevented from taking his holiday entitlement. The EAT therefore remitted the case back to the employment tribunal for reconsideration on the facts.

In this case there was insufficient evidence to show that the claimant had been denied the opportunity to take holiday. In any event with a series of unlawful deductions from wages the Bear Scotland decision applied which states that where there are gaps in the deductions the claim is limited to three months.

The EAT also addressed the discrimination award for injury to feelings and held that this award did not have to be reduced because the salesman knew his services could have been terminated in any event. The feelings of anger hurt and humiliation resulting from the discriminatory act were still taken into account even if he knew his contract may come to an end anyway.

Implications for employers

• This case was heard after the recent case of Bear Scotland Ltd v Fulton and another; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others and dealt with two important issues: holiday pay and how awards for injury to feelings should be calculated.
• The Working Time Regulations 1998 set out the minimum annual entitlements of each worker, comprising 4 weeks' paid holiday as required by the Working Time Directive and an additional 1.6 weeks' extra UK entitlement.
• The paid leave may be taken in instalments, but only be taken in the leave year in which it is due and a payment in lieu should not be substituted unless the worker's employment is terminated.
• Previous holiday pay claims have been based on workers being prevented from taking holiday due to absence from work by reason of sickness or maternity or other parental leave. This case potentially extends this principle. Workers who can show they have been prevented from taking leave for reasons beyond their control, e.g. workload, may be allowed to carry this leave over into the next holiday year.
• The EAT said this claim should not be a claim for unpaid wages, but a claim for compensation under the Working Time Regulations.
• The 'use holiday or lose it' presumption is now less certain. Employers should see if workers have been prevented from taking holiday due to sickness or because of reasons beyond their control.
• Employers should ensure that all staff use holiday throughout the holiday year and do not allow problems to accumulate.
• Discrimination awards may be subject to 10% uplift according to this case, under the principle laid down in Simmons v Castle (unreported, [2012] EWCA, 188 (CA) as in general damages for personal injury claims. However another case De Souza v Vinci Construction UK Limited (unreported, UKEAT/0328/14 20 March 2015, EAT) said that the 10% uplift to general damages which applies in the civil courts does not apply to employment tribunal awards. This leaves conflicting EAT authorities on the point.

UKEATS/0047/13, UKEAT/0160/14, UKEAT/0161/14
Issue: Calculating holiday pay – overtime

These test cases concerning the calculation of holiday pay follow a progression of similar cases, including British Airways v Williams (unreported, [2012] UKSC 43 17 October 2012, SC) and Lock v British Gas Trading Ltd (unreported, Case C‑539/12 22 May 2014, ECJ) on the issue of the extra payments that should be taken into account when calculating holiday pay over and above merely basic pay.

The three employers in this case were engaged in road maintenance, industrial services and engineering consultancy and failed to include overtime and other payments associated with the work in calculating holiday pay. As a result the employees claimed that unauthorised deductions had been made from their wages. (A third case Neal v Freightliner (unreported, ET 1315342/2012) ET) was scheduled to be conjoined with the other cases but settled shortly before the hearing.)

The Employment Appeal Tribunal held in favour of the employees and found that non-guaranteed overtime payments must be included in the holiday pay calculation for the employees’ four weeks’ EU holiday entitlement. (Non-guaranteed overtime is overtime an employer is not obliged to offer, but employees are required to perform). Also:

• the additional 1.6 weeks paid holiday available in the UK under the Working Time Regulations need not include overtime, and
• the employees could not claim underpayment of wages if there was more than three months between the underpayments - this has effectively limited claims for back pay, and
• the travelling time payments do fall within the definition of normal remuneration and should be included in calculating holiday pay, but travel expenses such as a plane, train ticket or bus fare are not directly linked to work and do not need to be included.

Although claims for backdated holiday pay may be limited by a gap of three months, this point may be appealed which could leave employers vulnerable to more substantial back claims, although at present this seems unlikely.

Implications for employers

• Employees are all entitled to a week’s holiday pay in respect of each week of their statutory 5.6 weeks’ (or 28 days’) holiday entitlement.
• Holiday pay calculations need to include certain additional payments, such as commission, provided they are 'normal remuneration'.
• Workers and employees are also entitled to have overtime and extra shift payments counted towards their holiday pay.
• The overtime and extra shifts must be 'intrinsically linked' to the performance of the tasks required under the contract of employment.
• Employers should consider the 'knock on' effect of regular overtime payments. If staff do work which is ‘intrinsically linked’ to the performance of their contractual tasks these should be included when calculating holiday pay.
• Both guaranteed overtime (overtime which the employee is contractually entitled to receive and is required to do) and non-guaranteed overtime (overtime an employer is not obliged to offer but employees are required to perform) must be included in the holiday pay.
• Compulsory overtime (overtime that an employer can require the employee to do in addition to normal working hours) and probably regular voluntary overtime must be included in holiday pay as well.
• All aspects of pay that are 'intrinsic' to the performance of the work should be included in the calculation of holiday pay. Payments that are 'intrinsically linked' to the performance of the job might include bonuses, commission, overtime pay, performance-related pay, call-out supplements and anti-social hours allowances.
• The requirement to include extra payments only applies to the four weeks' holiday pay entitlement which derives from the EU Working Time Directive.
• The additional 1.6 weeks paid holiday that UK employees are entitled to under the Working Time Regulations 2008 does not need to include an amount for any extra payments.
• Aspects of the worker's total remuneration that are intended only to cover costs when performing the task such as travel expenses do not have to be included in the calculation of holiday pay.
• Radius allowances and travelling time payments do fall within the definition of 'normal remuneration' when calculating holiday pay.
• Employers who only take basic pay into account when calculating holiday pay when commission arrangements are normally in place may be exposed to unlawful deductions of wages claims for underpayments for at least three months. Although claims for back-dated underpayments of holiday pay are at the moment still limited this could change on appeal and in some cases employers may be vulnerable to regular payments made over a number of years.
• Although the decision in this case is subject to appeal, all employers should review their policies on annual leave payments and commission to see which additional payments are part of their workers' salary, or perhaps try to vary commission structures. This will be difficult if these have become contractual, unless the employees agree to a variation.
• The Government has set up a task force to consider the impact of these cases for employers, so further legislation will probably follow. Meanwhile employers should look at how holiday pay is calculated and consider which extra regular payments which employees receive may need to be included in the calculations.

KG C-118/13
Issue: Rights of deceased workers to be paid in lieu of untaken holiday​

​A retail worker in Germany who was employed from 1 August 1998 had been seriously ill since 2009 and was unfit to work until the date of his death on 19 November 2010. By the time of his death he had accumulated 140.5 days of untaken annual leave and his widow applied to his employer for a payment in lieu of this annual leave. The employer rejected the application saying untaken holiday was not an inheritable right and a German court asked the European Court of Justice (ECJ) for a preliminary ruling.

The ECJ decided that the death of a worker does not extinguish their right to statutory paid annual leave.

Implications for employers

• Personal representatives can generally bring claims under section 1 of the Law Reform (Miscellaneous Provisions) Act 1934 which provides that entitlements of a worker who has died pass to their estate.
• On the termination of employment, payment in lieu of untaken holiday must be paid to a worker who has been on sick leave for the whole or part of the leave year. EU law also says that in the event of an employment relationship being terminated by the death of the worker the entitlement to paid annual leave is not lost and payment must be made in lieu of the amount of leave accrued but not taken.
• The payment does not depend on a prior application for a payment in lieu of holiday entitlement by the dying party or their beneficiary.
• The ECJ's decision in this case relates to the four weeks' annual leave to which workers are entitled under EU law which forms part of the Working Time Regulations 1998 (WTR).
• When a worker dies any payments that would have been due and paid to them must include a payment for the four weeks of accrued holiday that is untaken at the time of death. This is the holiday under under Regulation 13(1) WTR.
• The additional right to 1.6 weeks paid leave per year in the UK, or any contractual entitlement above the 5.6 weeks is not governed by this case. However employers should review their practice on payment in lieu of outstanding accrued entitlement when a worker dies in service to consider what the contract says, as contractual rights are inheritable by the beneficiaries.( This applies to the extra holiday over and above the 4 week European minimum under under Regulation 13A WTR).

ET 1315342/2012​
Issue: Calculating holiday pay - voluntary overtime

​A Multi-Skilled Operative (MSO) at a depot in Birmingham worked a 35 hour week. He was supposed to do seven-hour shifts plus overtime when necessary. He had agreed to work one Saturday in every three. His actual hours varied daily in accordance with a weekly roster.

In reality he worked shifts of eight-and-a-half or nine hours with occasional 12-hour shifts. A local collective agreement also provided for a nine-hour shift pattern.

The additional ‘voluntary’ two hours per week were not taken into account for the purpose of calculating holiday pay. The MSO said in practice he worked nine hours and not seven hours per week.

The Working Time Directive requires that holiday pay must correspond to a worker’s normal remuneration and should include payments which are ‘intrinsically linked’ to the performance of the tasks which the worker is required to carry out under their contract.

The MSO won his claim for unauthorised deductions from wages and a breach of the Working Time Regulations 1998. Holiday pay should not be based solely on basic salary. The work he did as overtime and on weekends was work that he was required to carry out under his contract.

Implications for employers

• Workers and employees are entitled to have overtime and extra shift payments counted towards their holiday pay.
• The overtime and extra shifts must be intrinsically linked to the performance of the tasks required under the contract of employment.
• Employers should consider the 'knock on' effect of regular overtime payments. If staff do work which is ‘intrinsically linked’ to the performance of their contractual tasks these should be included when calculating holiday pay.

​​[2012] EUECJ C-229/11
Issue: Calculating holiday pay - reduction in working time

A German employer dismissed two employees when it ran into financial difficulties. The employer and the works council agreed instead to put the employees on 'zero hours short-time working' contracts for one year. They did not have to work and the company did not have to pay them a salary. They received an allowance from the German Government. The employees claimed holiday pay during this period.

The German court asked the ECJ if EU law allows paid annual leave to be reduced in proportion to workers' reduced working time during a period of financial difficulties for the employer. The ECJ decided that workers placed on short time working and workers unable to work as a result of illness were not in the same position. The ECJ found that those on short time working are more comparable to part time workers and so their holiday pay can be reduced in proportion to the reduction in working time.

Implications for employers

• Most workers who work a five-day week must receive 28 days paid annual leave per year, that is, the annual entitlement of 5.6 weeks. Employers cannot avoid this.
• Employers are obliged only to provide casual workers employed under certain types of arrangement with a pro rata statutory holiday entitlement, based on the hours actually worked.
• The holiday pay of a worker on a zero-hours or short time contract can be calculated on the basis of the work done.
• If a worker does no hours because of a lack of work, their holiday pay can be reduced to zero.

Case C-155/10, 15 September 2011 and Case C 155/10, 16 June 2011
Issue: Calculating holiday pay

Airline pilots claimed that their employer had breached the Civil Aviation (Working Time) Regulations 2004 by paying holiday pay at a basic rate only and not including flying allowances. The pilots’ salary is comprised of:

• a fixed annual sum
• a 'flying time supplement', and
• 'time away from base supplement'.

However, their holiday pay is calculated exclusively on the fixed annual sum.

The Court of Appeal essentially held that holiday pay was not necessarily the same as pay earned while working. However Supreme Court (SC) referred to the case to the European Court of Justice (ECJ), asking it to consider the question of what is meant by ‘paid annual leave’ under both the Civil Aviation Directive (2000/79/EC) and the Working Time Directive (93/104/EC).

In September 2011, (following the Advocate General’s opinion), the ECJ handed down their judgment which essentially decided that the flying allowances for the pilots were part of the pilots' normal remuneration and must be paid during annual leave as well as basic salary. The ECJ also emphasised numerous points including the following:

• The objective of EU legislation in imposing on all Member States an obligation to allow workers a minimum period of paid annual holiday is to protect and promote the health and safety of workers.
• The term 'paid annual leave' in the Working Time Directive (WTD) means that for the length of annual leave, remuneration must be maintained. Workers must not suffer any disadvantage as a result of deciding to take annual leave.
• Pay for annual leave must 'correspond to the normal remuneration received by the worker'. This meant that the ECJ rejected airline's argument that it was sufficient to pay only basic pay during annual leave.
• The ECJ agreed with the pilots that extra payments linked to the performance of the tasks which they performed under their contracts should be included in their pay during annual leave.
• Although the flying allowances should be taken into account when determining the proper level of the pilots’ holiday pay, the away from base supplements also paid to the pilots need not be taken into account when calculating the appropriate rate of holiday pay for the pilots.
• The case will now be remitted back to the Supreme Court for further consideration where it is hoped that further practical guidance will be given.

Implications for employers

• The matter will now return to the UK courts but it appears that employers in the airline industry cannot pay holiday pay at the basic rate only and should include flying allowances in their calculations.
• Paid annual leave means the same for crew members in the civil aviation sector as for the bulk of other ‘normal’ workers. Presumably the decision in this case also applies to other workers in other sectors with specific regulations.
• Certainly it appears that pilots’ paid annual leave is governed by the WTD in the normal way.
• The principles in this case have potential wider ramifications for many employers, not simply the airline industry.
• Employers cannot simply rely upon the UK working time regulations to comply fully with the obligation under EU law to ensure that workers receive normal remuneration during any periods of annual leave, which is 'comparable to periods of work'.
• Holiday pay must be determined in such a way as to correspond to the workers' normal remuneration.
• Normal remuneration means that in addition to basic wages, other consideration, either in cash or kind which the worker receives, directly or indirectly, in respect of their employment should be included. This may include bonuses, ex-gratia payments and supplements or allowances for mobility, working overtime, or certain shifts.
• Employers whose workers regularly undertake non-contractual overtime; or who have ‘stand by’ duties; or who receive a significant proportion of their salary as commission payments, may face an argument with their employees that such payments fall within normal remuneration for annual leave purposes.
• If an employee’s remuneration is made up of several contractual and non-contractual separate elements, then employers (particularly in the public sector) will need carefully to consider what should be included in annual leave payments.
• All employers should consider reviewing their policies on annual leave payments.
• Employers should consider the commercial implications of allowing for supplements to be included in the calculation of average remuneration during the period over which annual leave is calculated. For example, if overtime is worked on a regular basis it may need to be included in the average earnings of a worker.
• Employees do not have the right to all conceivable supplements and are not entitled to receive any more than their normal remuneration. However it appears that supplements must be included in the calculation of average remuneration if they are systematic components of pay.
• Employers should be aware that there is now a potentially broad definition of 'normal remuneration' for the purposes of annual leave to ensure that the worker on leave is in a position which is comparable to that when they are working.
• Workers payments which are over and above basic pay which are linked to the performance of the tasks performed under the workers contracts should be included in annual leave payments.
• Any payments related relating to a worker’s personal and professional status should be included in annual leave payments as well.
• Payments made by employers exclusively connected with costs arising in connection with a particular activity (in the pilots’ case, for example, costs incurred whilst away from base) may be excluded.
• Member States can set out the method of calculating average remuneration using a sufficiently representative reference period. The reference period may be the specific period during which the worker was on leave or an earlier period when the worker was continually active. The 'comparable rate' of pay should be calculated according to a representative reference period, but the court did not provide any guidance as to what sort of reference period would be acceptable under EU law.
• As the term 'paid annual leave' in the WTD means that for the length of annual leave, remuneration must be maintained. The then House of Lords was therefore wrong in the case of Stringer and v HM Revenue and Customs [2009] 677 HL. In this case the HL stated that the definition of paid annual leave meant pay 'comparable' to that earned while working, so deductions could be made from normal remuneration where appropriate.

Case C 155/10
Issue: Holiday pay - flying allowances​

Airline pilots claimed that their employer had breached the Civil Aviation (Working Time) Regulations 2004 by paying holiday pay at a basic rate only and not including flying allowances. The pilots’ salary is comprised of:

• a fixed annual sum
• a 'flying time supplement', and
• 'time away from base supplement'.

However, their holiday pay is calculated exclusively on the fixed annual sum.

The Court of Appeal essentially held that holiday pay was not necessarily the same as pay earned while working. However Supreme Court (SC) referred to the case to the European Court of Justice (ECJ), asking it to consider the question of what is meant by ‘paid annual leave’ under both the Civil Aviation Directive (2000/79/EC) and the Working Time Directive (93/104/EC).

The Advocate General has given a preliminary opinion on the issues which suggests that the flying allowances for the pilots were part of the pilots' normal remuneration and must be paid during annual leave as well as basic salary. The ECJ often (but not always) follows this opinion. The preliminary opinions are that:
The term 'paid annual leave' in the Working Time Directive means that for the length of annual leave, remuneration must be maintained. Workers must not suffer any disadvantage as a result of deciding to take annual leave. The then House of Lords was therefore wrong in the case of Stringer and v HM Revenue and Customs [2009] 677 HL. In this case the UK court stated that the definition of paid annual leave meant pay 'comparable' to that earned while working, so deductions could be made from normal remuneration where appropriate. (The Advocate General referred back to the judgement of Robinson-Steele v R D Retail Service [2006] IRLR 386, ECJ).

Holiday pay must therefore be determined in such a way as to correspond to the worker's normal remuneration.

Normal remuneration means that in addition to basic wages, other consideration, either in cash or kind which the worker receives, directly or indirectly, in respect of their employment should be included. This includes bonuses, ex- gratia payments and supplements or allowances for mobility, working overtime, or certain shifts.

Supplements must be included in the calculation of average remuneration only where they are systematic components of pay. Member States can set out the method of calculating average remuneration using a sufficiently representative reference period. The reference period may be the specific period during which the worker was on leave or an earlier period when the worker was continually active.

Implications for employers

• Although employers in the airline industry at the moment remain entitled to pay holiday pay at the level of basic rate only and not including flying allowances this looks set to change imminently. Once a decision is reached it could have a major impact on airline industry employers and possibly all other employers as well.
• Although the decision is not final, all employers should consider reviewing their policies on annual leave payments.
• Employers should consider the commercial implications of allowing for supplements to be included in the calculation of average remuneration during the period over which annual leave is calculated. For example, if overtime is worked on a regular basis it may need to be included in the average earnings of a worker (assuming the ECJ and SC endorse the preliminary opinion).
• Employees do not have the right to all conceivable supplements and are not entitled to receive any more than their normal remuneration. However it appears that employers should include supplemental pay in the calculation of average pay where such payments are systematic components of pay.
• Employers should be aware that there is a potential broad definition of 'normal remuneration' for the purposes of annual leave to ensure that the worker on leave is in a position which is comparable to that when they are working.

ET/1702926/09​
Issue: Unpaid holidays

An employee transferred to the employer in 2007 who promised that no one transferring would lose any holiday entitlement which had not been used before the transfer. The employee had two weeks accrued holiday which was carried forward to the 2008 leave year. He was also entitled to four weeks holiday in 2008 leave year which added up to six weeks holiday. He did not take the six weeks holiday, but went on long-term sick leave from May 2008 to August 2009 when he resigned. The employer paid him in lieu of holiday which had been accrued in 2009 up to his resignation. The employee agreed that he had been paid for all the unused holiday he accrued during the 2009 leave year but claimed that he had not been paid for his accrued holiday relating to the period of 2007 and 2008, which equated to a total of six weeks' unpaid wages (made up of the two weeks' holiday he had rolled over into the 2008 leave year and the additional four weeks' holiday accrued during the 2008 leave year).

The employee brought claims for unlawful deductions from wages and under the Working Time Regulations regarding the unpaid but not taken six weeks holiday. He relied on the HL decision in the Stringer case stating he had been unable to take this holiday due to his period of sickness.

The employment tribunal held that as the employer had paid the employee in lieu of holiday that had accrued up to August 2009, it broke the ‘series of deductions’ and prevented the employee from claiming holiday from previous leave years.

The employment tribunal also referred to the finding in Stringer that employees on sick leave were allowed to carry their holiday entitlement forward if they had been ‘denied’ it. In this case the employee had not asked for any holiday and therefore he had not been denied it.

Implications for employers

• This was only a tribunal decision and is not therefore binding on any higher tribunal or court, but it appears that if employers make a payment in lieu of any accrued but unused holiday entitlement for the current holiday year this may deprive an employee of the right to claim holiday pay for previous holiday years in certain circumstances.
• This decision is good for employers, but it is only a tribunal decision and the position on holiday and sick pay still remains unclear.
• It also appears that employers can avoid making payment for accrued holiday during sick leave if the employee has not asked to take the holiday - because employees can only claim they are 'denied' the right to take holiday if they requested to take it.
• For additional and more detailed implications arising from case law in this area see the ECJ and HL decisions in Stringer and Others v HM Customs.
• The best practice approach is still to be wary of denying holiday pay to employees who have been absent for part of the year and to deal with such holiday issues concerning both contractual and statutory holiday in advance in a clear policy.
• As the law is now going through a process of change employers must be very careful with employees who are on long-term sick leave as they are also likely to be protected by the Disability Discrimination Act 1995.