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Employee Holiday Entitlement

There have been two important judicial decisions relating to employees’ holiday entitlement.

One is of significance to the many employers who pay staff for working overtime.

The other relates to the entitlement of employees to carry over untaken holiday from one year to the next when they have been off sick, and so is significant to all employers.

Overtime and Holiday Pay

An employment judge has held that an employer should have taken an employee’s payments relating to voluntary overtime into account when calculating his holiday pay in respect of the minimum 4 weeks' annual leave required by the Working Time Directive (“the Directive”).

The Working Time Regulations (“the Regulations”), which give effect to the Directive in the UK, entitle employees to a minimum of 5.6 weeks’ paid annual leave. They state that statutory holiday pay is to be calculated using provisions which have been interpreted to exclude overtime, unless it is guaranteed, and overtime premia.

In this case, Mr Neal worked as an operative for a company called Freightliner Ltd (“Freightliner”). His contract provided for a 35-hour week made up of 7-hour shifts. However, it stated that he "may be required to work overtime when necessary". Mr Neal never, in fact, worked shifts as short as 7 hours. Rather, he worked shifts of 8.5 or 9 hours in accordance with rosters, and occasionally shifts of up to 12 hours to cover for absent colleagues. He received a premium for time worked over and above the contractual 7-hour shifts.

Freightliner’s view was that operatives could decline to undertake work beyond the 7-hour contractual requirement, and therefore all overtime worked by Mr Neal was voluntary. It therefore calculated Mr Neal's statutory holiday pay with reference to his 35-hour basic salary only, with overtime disregarded.

However, the employment judge decided that European law requires that overtime hours, pay and premia be included in the holiday pay calculation relating to the 4 weeks annual leave entitlement under the Directive.

This decision is significant. However, it is not binding. Unless and until the legislation is amended or the Employment Appeal Tribunal (“EAT”) or the higher courts have the opportunity to consider the matter, it will be for each employment tribunal to take its own view as to whether to adopt the same approach as in Mr Neal’s case, or to apply the Regulations to exclude overtime premia and the effects of anything other than guaranteed overtime.

At least until the legal position is clarified, however, employers who do not currently do so might consider taking all paid overtime into account when calculating the first 4 weeks of holiday pay in each year – or at least reserving sums in this regard in the event of future claims.

If such payments are to be introduced, but an employer wishes to avoid being bound to continue the practice if the law is clarified the other way, it would be prudent to make it clear that the practice is being adopted only as a contingency in case the interpretation of the law in Mr Neal’s case is correct, and to reserve the right to alter the practice in the event that it is, in fact, determined to be incorrect, or if the law is amended.

Indeed, employers might go a step further and reserve the right to recover such additional net payments as are made to employees in the event that the approach in Mr Neal’s case is determined to be incorrect. In this event, it would be advisable to ensure that there is an enforceable power to deduct such sums from future earnings, should this be required. However, the industrial relations impact of such an approach should first be considered, as should the practical difficulties that might be encountered in recovering sums from employees who leave the employment before any sums can be deducted from earnings.

It is noteworthy that Mr Neal sought overtime payments only in respect of the 4 weeks' leave required by the Directive, and not the full 5.6 weeks' leave provided for under the Regulations. There has been some debate, mainly in the context of workers on long-term sick leave (see below), as to whether the Directive's requirements must be applied to the entire 5.6 weeks.  It seems not.

Holidays and Sick Leave

Where a worker is prevented from taking statutory minimum holiday entitlement due to long-term sickness absence, he or she is entitled to carry it over to the next holiday year.
Our view has been that this applies only in respect of the 4 weeks’ leave under the Directive, and not the full 5.6 weeks' leave under the Regulations.  Confirmation of this was awaited, however, and this has now been provided by the EAT.

This case involved a Mr Healy, who worked for a company called Sood Enterprises Ltd as a handyman and car washer. Mr Healy was entitled to 5.6 weeks’ holiday, in accordance with the Regulations: 28 days. In July 2010, he suffered a stroke and was off work until he resigned on 6 June 2011. His absence straddled two holiday years, which ran from January to December. Mr Healy had taken 11 days' holiday in 2010, leaving 17 days untaken, and his pro-rata holiday entitlement for 2011, calculated up to the termination date, was 14 days. He received no payment in lieu of accrued holiday on termination of employment.

An employment tribunal held that Mr Healy should have been paid for all 17 days of holiday that he was prevented from taking due to illness in 2010, on the basis that these were carried over to the next holiday year, as well as for the 14 days accrued in 2011.

The EAT has held, however, that Mr Healy was not entitled to carry over the additional 1.6 weeks' leave under the Regulations to the following leave year – only the untaken element of his 20-day leave entitlement under the Directive, i.e. 9 days. The award for the full 14 days accrued in 2011 was, however, correct.

For advice relating to the above issues, please contact me (T: 01952 211010; E: john.merry@lblaw.co.uk) or Will Morse (T: 01432 377152; E: will.morse@lblaw.co.uk).