Annual leave and holiday pay Q&As
Commonly asked questions on the legal issues relating to bank holidays, annual leave entitlement and calculating holiday pay
Selected cases on employees' rights to holiday pay
Here we list a selection of key cases on employees’ rights to holiday pay, providing a summary of the decision and implications for employers.
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[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.
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.
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:
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.
[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.
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.
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:
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.
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.
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.
[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.
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:
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:
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:
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.
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.
Please note: While every care has been taken in compiling these notes, CIPD cannot be held responsible for any errors or omissions. These notes are not intended to be a substitute for specific legal advice.
Commonly asked questions on the legal issues relating to bank holidays, annual leave entitlement and calculating holiday pay
Frequently asked questions on the legal issues relating to bank holidays