Working Time and Contractual Holiday - the cases and the law in a nutshell

Basic entitlement to holiday under the Working Time Regulations 1998 (SI 1998/1833)(‘WTR’)

  • Workers[1] are entitled to 5.6 weeks paid holiday (‘statutory holiday’) each holiday year under the WTR  (more than the minimum four weeks stipulated under the Working Time Directive (2003/88/EC) (‘the Directive’)
  • No qualifying period of employment is necessary for this entitlement
  • Part time workers will be entitled to a pro rata amount of holiday leave and if a worker starts employment part way through the year, the leave is pro rated
  • In Greenfield v the Care Bureau[2] the ECJ held that where a part time worker’s working hours are increased, paid statutory holiday already accrued under the WTR remains the same. There must be a re-calculation of statutory holiday only for the period of work during which the worker increased the number of hours worked. Further, when calculating paid annual leave, the principles of calculation are the same whether the employment is continuing or has terminated
  • The holiday year is set out in a ‘relevant agreement’ (such as a contract of employment, staff handbook or collective agreement)
  • Employers can offer additional holiday which will not be subject to the WTR rules (‘contractual holiday’)

Taking statutory holiday

  • A worker can take statutory holiday by giving notice twice as many days in advance of the earliest day specified in the notice as the number of days leave required (Regulation 15 WTR). For example 14 days' notice for 7 days holiday.
  • The employer may serve a notice requesting the worker to take - or not to take - leave on particular days. The employer can nominate single day/s where the employee is otherwise contracted to work such day/s(Sumsion v BBC Scotland)[3]
  • Entitlement to annual leave can be satisfied by time off when the employee is not required to work, for example shut down periods/onshore leave (Russell and others v Transocean International Resources Ltd and others [2011] UKSC SC)
  • The employer’s notice must specify the days that should - or should not - be taken. When it requires leave to be taken, it should be given twice as many days in advance of the earliest day specified in the notice as the number of days' leave to which it relates. Where it requires leave not to be taken (for example, declining an employee's request) it should be given as many days in advance of the earliest day specified in the notice as the number of days leave to which it relates.

Contractual holiday

  • Contractual holiday in excess of 5.6 weeks statutory holiday under the WTR is not subject to the statutory rules
  • It is open to the employer to set out rules in a relevant agreement that apply only to contractual holiday (above the statutory entitlement), e.g. that a worker can or cannot carry forward contractual holiday if it is not used by the end of the holiday year and that certain conditions apply. Contractual holiday can also be paid at a different rate (e.g. just basic pay)

Varying notice requirements

  • A relevant agreement (see above) can vary the notice requirements for statutory holiday
  • A relevant agreement may set out other conditions for taking holiday (e.g. seeking line manager’s consent)

Carry forward of holiday leave

  • There is a distinction between the minimum four weeks holiday leave stipulated under the Directive and the additional 1.6 weeks under the WTR
  • The WTR provide that the four weeks minimum holiday entitlement under the Directive must be taken in the holiday year to which the entitlement relates or be lost.
  • However, the additional 1.6 weeks’ statutory holiday leave under the WTR can be carried forward into the next holiday year if a relevant agreement provides for this (Regulation 13A7).
  • If a worker cannot take statutory holiday in the leave year to which it relates for reasons outside his control, he may be able to carry this leave forward to the next leave year: see Sash Window Workshop Ltd v King[4] where the employee was refused leave because he was wrongly not considered an employee or worker. See also more information below as regards annual leave and sickness and annual leave and family leave.

Statutory holiday pay

  • Under the WTR a worker must be paid in respect of statutory holiday to which he is entitled at the rate of a ‘week’s pay’[5] (Regulation 16). A week’s pay is defined in the Employment Rights Act (ERA) and in this case is uncapped. ERA draws a distinction between workers with normal working hours[6] (what the worker gets paid for working those hours in one week) and those with no normal working hours (the worker’s average actual weekly remuneration).
  • Article 7 of the Directive provides that 'every worker is entitled to paid annual leave of at least four weeks' butdoes not set out how holiday leave should be paid. In Robinson-Steele v RD Retail Service Ltd[7] the ECJ stated that workers should be paid their ‘normal remuneration’ and in Williams and others v British Airways[8] the ECJ ruled that ‘normal remuneration’ should include
  • basic pay
  • remuneration that is ‘intrinsically linked’ to the performance of the task
  • remuneration which relates to the worker’s ‘personal and professional status’
  • So, expenses, benefits in kind and bonuses/ other payments that are not linked to the worker’s performance will not be included but payments such as incentive bonuses and shift allowances will be. See also Schultz-Hoff and Stringer and others[9] in which the ECJ held that the purpose of the requirement of pay for that leave is to put the worker in a comparable position to periods of work with relation to remuneration
  • The Directive requires workers to be paid their normal remuneration during statutory holiday leave due under the Directive (i.e. four weeks) (See Robinson-Steele)
  • The case of Bear Scotland v Fulton[10] requires employers to take into account non-guaranteed overtime payments when calculating a week’s pay. The ECJ held that a ‘week’s pay’ under ERA does not comply with the Directive’s requirement for ‘normal remuneration’. The WTR must be interpreted in such a way as to be compatible with the Directive.
  • The EAT in Bear Scotland decided that there should be a direct link between the payment and the work a worker is required to carry out: this encompasses non-guaranteed overtime
  • The position has been more uncertain in relation to voluntary overtime. However In Patterson v Castlereagh Borough Council[11] the Northern Ireland Court of Appeal found that there was no reason in principle why voluntary overtime should not be included in calculating holiday pay. In July 2017, the EAT in Dudley Metropolitan Borough Council v Willetts & Ors (Working Time Regulations) [2017] UKEAT 0334_16_3107 (31 July 2017) upheld the ET decision that 56 individuals were entitled to have the following elements of pay for additional voluntary hours worked considered as part of a week’s pay for the purpose of calculating statutory holiday pay: out of hours standby payments, call out allowances, mileage or travel allowances linked to the above and regular additional voluntary overtime . The EAT took into account that EU law requires that normal (not contractual) remuneration must be maintained in respect of the four-week period of annual leave guaranteed by Article 7 (of the WTD) and that 'it will be for the fact-finding tribunal to determine whether it is sufficiently regular and settled for payments made in respect of voluntary overtime to amount to normal remuneration'.The court accepted that any financial disadvantage may deter a worker from taking leave and so it is incompatible with the overarching objectives of Article 7 to simply exclude pay for voluntary overtime from the calculation of pay for Regulation 13 (the 4 weeks under the WTD) annual leave. As such the EAT suggested that the absence of an intrinsic link between the payment and the performance of tasks required under the contract  (as suggested in Williams)  does not automatically exclude such a payment from counting. Howerver it went on to state that, if it were wrong on the ‘intrinsic link’ point and this were required in every case, it would have held that this criterion was satisfied on the facts. In particular, in that absence of a contract of employment, the specific agreement or arrangement made for voluntary overtime would not exist and  'the payments made were all directly linked to tasks the employees were required to perform under their contracts of employment and, once those shifts or standby periods began, they were in no different position from an employee who is required by his contract to work overtime or be on standby or attend callouts'.
  • The case of Lock v British Gas Trading and others[12] found that normal remuneration must include regularly paid contractual commission (in this case commission was calculated with reference to level of sales). In February 2016, the EAT upheld the ET decision and in October 2016 the Court of Appeal agreed. The Supreme Court refused leave to appeal the decision further.

‘Rolled up’ holiday pay

  • It is not possible to ‘roll up’ bonuses etc into holiday pay: see Robinson-Steele in which the ECJ held that rolled up holiday pay (a payment stated to be in part wages for work done and in part in respect of holidays not yet taken) would discourage workers from taking holidays to which they were entitled
  • The ECJ ruled that such practices should be discontinued and government guidance was amended to provide that employers should re-negotiate contracts with rolled-up holiday pay so that payment for statutory holiday leave is made when the holiday is taken
  • However the ECJ also suggested that sums already paid to a worker under a rolled-up holiday pay scheme could be set off against the holiday pay due to the worker, provided that the arrangements were sufficiently transparent and comprehensible and the sums represented an addition to pay for work done. Whilst this is sometimes relied upon by employers to support a rolled up arrangement is not clear that it would apply to arrangements put in place after the decision and it is often the case that the sums paid do not reflect the correct entitlement which must be assessed as explained in Statutory Holiday Pay above.
  • In Lyddon v Englefield Brickwork Limited[13] the EAT held that rolled up holiday payments could be set off against Mr Lyddon’s right to statutory holiday pay because the payments were contractual and met the criteria of transparency and comprehensibility as set out in Robinson-Steele. The contract satisfactorily identified the sums referable to the holiday period.
  • Interestingly the Taylor review has suggested that 'dependent contractors' (the renaming they suggest for 'workers') should be given the opportunity to receive rolled-up holiday pay. However it is unlikely that such a proposal could be implemented pre - Brexit given the entitlements set out in the European WTD.

What happens if an employee cannot take holiday because of sickness?

In a nutshell, although the WTR provide that the four weeks of WTD leave must be taken in the leave year it accrues, case law has provided that workers should be able to carry the four weeks of WTD leave forward for up to 18 months, where it has not been possible to take the leave because of sickness.  A worker who is off sick during any period of scheduled holiday should be able to take that leave at another time

The more detailed points are:

  • The key cases in this area are Schultz-Hoff v Deutsche Rentenversicherung Bund; Stringer and others v HMRC and[14] and Pereda v Madrid Movilidad SA[15].
  • The ECJ (and the House of Lords) in Stringer held that paid statutory holiday continues to accrue throughout any period of sick leave and if the worker’s employment is terminated whilst on sick leave, he must be paid in lieu of accrued unused statutory holiday leave. This is the case even if the worker has been on sick leave for the whole year. It further held that member states can pass legislation to prevent workers from taking statutory holiday during sick leave provided they are allowed to take that holiday at another time. Under the WTR, workers should be allowed to take paid statutory holiday during sick leave. If the worker cannot take statutory holiday during the leave year, it must be carried forward into the next leave year
  • In Pereda the ECJ held that the Directive must be interpreted so as to preclude national legislation or collective agreements under which a worker who is off sick during any period of scheduled holiday leave forfeits his holiday leave. The worker should be able to take that leave at another time and to carry it forward to the next leave year.
  • In KHS AG v Schulte[16] the ECJ held that a limit can be set on how much statutory holiday can be carried forward to the next leave year. In that case, the ECJ held that the Directive did not preclude a relevant collective agreement which provided that holiday which was not taken within 15 months of the leave year would be lost.
  • In the UK, the EAT has held in Plumb v Duncan Print Group[17] that a worker does not need to prove he is too ill to take statutory holiday in order for accrued unused statutory holiday to be carried forward to the next leave year. Following Schulte, the EAT held that carry forward was limited to within 18 months of the leave year in which the statutory holiday accrued.
  • In Sood Enterprises Ltd v Healy  [2013] UKEAT 0015 - EAT, 14th March 2013 the EAT held that the right of workers to carry over annual leave because they were off sick and unable to take holiday is limited to the basic right to four weeks' leave in Reg13(1) of the Working Time Regulations 1998 SI 1998/1833. There is no automatic right to carry over the additional leave of 1.6 weeks provided for by Reg 13A unless there is an agreement to this effect between the worker and the employer.
  • The Deduction from Wages (Limitation) Regulations 2014 (SI 2014/3322) amend the WTR and ERA 1996 to insert a limitation on how far back in time a tribunal can consider an unlawful deduction from wages claim. Such a claim can only be considered where the wages from which the deduction was made were paid within the previous two years.[18]
  • The ECJ held in Asociación Nacional de Grandes Empresas de Distribución v Federación de Asociaciones Sindicales and others that if a worker falls sick during a period of statutory holiday, the employer must allow him to re-schedule any part of his statutory holiday that coincided with his period of sickness.[19]  The UK courts followed this line in NHS Leeds v Larner[20] and Fraser v South West London St George’s Mental Health Trust[21]

 

What happens to holiday entitlement during maternity and other family leave?

  • Statutory and contractual holiday continues to accrue during maternity leave (Ordinary Maternity Leave and Additional Maternity Leave), adoption leave, shared parental leave and paternity leave. During parental leave, statutory holiday leave (but not contractual holiday) will accrue. If it is not used during the leave year during which the worker takes family leave, the balance of the national statutory entitlement of 5.6 weeks should be carried over into the next leave year (Merino Gomez v Continental Industrias del Caucho SA ECJ 2004).
  • Practically employers may wish to agree that a woman takes more than her accrued entitlement before going on maternity leave or that she takes it on return to work.
  • During any compulsory ‘shutdown’ whilst a worker is on maternity, adoption, shared parental or paternity leave, the right to accrue statutory holiday continues (but not contractual holiday if the employer provides otherwise – subject to any risk of sex discrimination). This reasoning (in Merino Gomez v Continental Industrias del Caucho SA ECJ 2004would appear to extend to bank holidays which occur during maternity leave - employers should not offset them against the statutory holiday entitlement but permit the time to be taken in lieu outside of the maternity period.
  • Employers should include a deductions clause in employment contracts in the event that an employee takes too much holiday. If an employee uses up all her holiday entitlement before going on maternity leave then resigns shortly afterwards the employer should then be able to recover holiday that has not accrued at the date of termination.

More information

For more comprehensive information please see our guide Holiday and Holiday Pay and for more information about other aspects of the Working Time Regulations and time off from work please see the list of guides under the topic Working Time, Holidays and Time off .

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[1] Section 230(3) Employment Rights Act (ERA)

[2] C-219/14

[3] UKEATS/0042/06

[4] UKEAT/0057/14  and the Attorney General's Opinion at  C-214/16

[5] Sections 221-224 ERA

[6] Section 234 ERA

[7] [2006] ICR 932

[8] [2011] IRLR 948

[9] [2009] ECR1-179

[10]  UKEAT/0047/13

[11]  NIIT/1793/13

[12] [2014] IRLR 648

[13] UKEAT/0301/07

[14] [2009] IRLR 214, C-350/06, C-520/06

[15]  [2009] IRLR 959

[16] [2012] IRLR 156

[17] UKEAT/0071/15

[18] These new provisions apply only to claims brought on or after 1 July 2015

[19] [2012] IRLR 779

[20] [2012] EWCA Civ 1034

[21] [2012] IRLR 100