Changes to calculating holiday and holiday pay

This article first appeared in the September edition of Payroll World Magazine.

Questions over holiday for those on long-term sick leave have become much clearer recently, but which payments count towards the calculation of holiday pay has been upset by a case last year concerning British Airways employees.

Sarah Peacock looks at the latest position regarding the carry-over of holiday during sick leave and the calculation of holiday pay in general.

Holiday during sick leave: The background

The Working Time Regulations 1998 (WTR), which give the statutory right to paid holiday, are quite clear: holiday not taken within the holiday year is lost (although a contract may grant more favourable rights). However, in the case of sickness absence, that doesn’t comply with the EU Working Time Directive. A worker is still entitled to accrue holiday and carry it over into the following holiday year if he or she is unable or unwilling to take it because of long-term sickness absence. With no change to the WTR yet, employers have had to rely on principles mostly derived from EU case law.

Workers on long-term sickness absence:

• may take paid holiday during absence but cannot be forced to
• do not have to request specifically to carry over statutory holiday to the next holiday year
• cannot indefinitely carry over statutory holiday spanning several years (it is not yet clear whether individual employers can impose a cut-off: if they can, 15 months after the end of the applicable holiday year is suggested as lawful, but nine months is not)
• must be paid for accrued statutory holiday (including any which has been carried over) at their normal rate of remuneration when their employment terminates.

However, the EU Directive only guarantees four weeks’ statutory holiday. Under the UK’s WTR, a worker has 5.6 weeks’ statutory holiday. Whether carry-over (for those on long-term sickness absence) had to be permitted for the ‘additional’ 1.6 weeks under the WTR as well as the minimum four weeks was unresolved.

EAT rules on carry-over of ‘additional’ 1.6 weeks holiday

The Employment Appeal Tribunal (EAT) has recently clarified that unless a worker and employer agree otherwise, there is no right to carry over the UK’s additional 1.6 week’s holiday even in cases of long-term sickness absence. The WTR allow the additional 1.6 weeks to be carried over by agreement, but only into the following holiday year. In this case Mr Healy had no such agreement with his employer. When his employment ended, the EAT found that Mr Healy was only entitled to carry over and be paid for the minimum four weeks’ holiday accrued in each holiday year whilst he was on long-term sick leave. National laws can set the parameters for statutory holiday above the minimum four weeks.

This means that, unless the contract says otherwise, a worker’s additional statutory holiday (1.6 weeks) and any contractual holiday in excess of the 5.6 weeks can both be lost if not used in the year they accrue, even if the worker is on long-term sickness absence. Employers only have to allow carry-over (for sickness absence, and subject to the potential 15-month limit), and payment on termination of employment, of the minimum four weeks’ holiday.

Voluntary overtime and other supplements included in holiday pay?

The calculation of statutory holiday pay in the WTR refers to the definition of “a week’s pay” in the Employment Rights Act 1996. However, that definition can exclude voluntary and non-guaranteed overtime, because “normal working hours” has been interpreted as including only hours specified by the contract, and excluding overtime above that. When British Airways pilots successfully challenged (under the EU Civil Aviation Directive) receiving only basic pay on holiday and none of their usual supplements, commentators noted that this could affect the WTR. Following the BA case, remuneration for holiday should include payments which are intrinsically linked to the performance of contractual duties. One Employment Tribunal has recently decided that it should include a worker’s overtime hours, pay and premia whether voluntary or not. It could arguably also include commission, bonuses, shift allowances and performance related pay.

As in Mr Healy’s case above, this interpretation might only affect the minimum four weeks’ holiday and not the additional 1.6 weeks or any contractual holiday. Whether Payroll and HR departments will be willing to overcome the practical and administrative difficulties in distinguishing between EU minimum holiday, UK additional holiday, and an individual’s contractual holiday is another question.

Postscript: this case is now being appealed to the Employment Appeal Tribunal. Watch this space!

Key points

• Unless agreed otherwise, workers on long-term sickness absence are only entitled to carry-over, and be paid on termination, four weeks’ statutory holiday from each holiday year
• Further clarification is still awaited through amendments to the Working Time Regulations 1998, which may also limit the carryover of holiday spanning several years
• Employment Tribunals are starting to rule that holiday pay should include voluntary overtime and other pay supplements, although this is not currently binding.