The rules on holiday entitlement for employees and workers (for the purposes of this article we will use 'employee' to mean both categories) are complicated enough in themselves, if you have ever read the Working Time Regulations. What makes it worse is that the rules come from a combination of European law governing part of each employee's minimum entitlement and UK which governs the rest of that entitlement.
Recently a number of cases have reached the higher courts of Europe and the UK which have given answers to many questions about holiday pay, but not necessarily made it any easier to grasp the rules. The aim of the article is to explain in plain English what these rules are so that employer's stay on the right side of the regulations. Here goes...
Under European law each employee is entitled to a least four weeks' annual leave each year. Every employer must comply with the European rules governing the four weeks' entitlement, and enforced by the courts of each member country. Most of these rules are set out in the Working Time Regulations but these must be interpreted in accordance with the original European Directive.
On top of that four weeks UK law permits each employee (or worker) a further 1.6 weeks leave each year. This must be administered according to the provisions of the Working Time Regulations 1998 relating to the 1.6 weeks, which differ from those rules governing the four weeks.
Employers are of course free to offer additional contractual entitlement on top of the 5.6 weeks which can be administered according to their own rules.
It used to be that if an employee fell sick at the same time as they were on annual leave that was tough luck. Of course, this was challenged and the European courts said that if an employee fell sick at the same time as they were on annual leave then they could choose to postpone that annual leave and take it at another time.
Further more, the European courts have stated that if an employee is unable to take their full entitlement within the annual leave year due to long term sickness then it will carry over to the next year, regardless of what the contract of employment states.
Annual leave will continue to accrue as long as the person is off sick and can be carried over indefinitely, unless the contract or any relevant agreement puts a limit on the amount can be carried over. Early indications from the European courts are that a provision that only the holiday accrued over the last 18 months of sick leave can be carried over. For many employers it is unlikely that an employee would be off that long without being dismissed on the grounds of capability and therefore it is probable that holiday entitlement accrued during sick leave under European law can be taken by the employee on their return to work, or paid in lieu on termination of employment.
The automatic carry over of holiday only applies to the four weeks' entitlement permitted by European law. The additional 1.6 weeks permitted by UK law may only be carried over if there is a contractual right permitting it.
Standard practice has been to calculate an employee's holiday pay based on their basic salary, excluding overtime or shift premiums. However, a recent Employment Tribunal decision has stated that such a calculation does not satisfy the requirements of European law and therefore holiday pay for the basic four weeks' entitlement must be calculated according to the employee's normal or average remuneration including any overtime, shift premium or other payment 'linked intrinsically to the performance of tasks the employee is required to carry out under his contract of employment'.
This decision could have substantial ramifications for businesses who do not take into account overtime, shift premium and other regular bonus payments into account when calculating holiday.
For the time being this is only an Employment Tribunal decision and is therefore not binding on other Tribunals or courts, and it has been appealed by the employer. However, it is an issue that demands close attention and we shall be providing further updates as it develops.
By Guy Woodcock
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