Holiday Pay & Profitability Bonuses - The Complexities of Calculation
Holiday pay calculations can be time consuming, complex and require up-to-date legal knowledge of the various different types of leave and the law applicable to each.
There is no shortage of cases exploring the need to include various elements of income in holiday pay calculations. The basic position is that staff should not be dissuaded from using their holiday entitlement if doing so means they are financially worse off than had they remained at work.
The reality is much more complicated however, as the recent case of Econ Engineering Ltd v Dixon and others demonstrates. In this case, the Employment Appeals Tribunal (EAT) confirmed a profitability bonus employees may receive does not fall within the statutory definition of a 'week's pay', and should also not be included in holiday pay calculations under regulation 13A Working Time Regulations 1998 (WTR).
Statutory Annual Leave
Under EU law, workers are entitled to four weeks' annual leave. This entitlement is enshrined in domestic law under regulation 13 WTR. In addition, the WTR also grants UK workers an additional 1.6 weeks' statutory holiday per year. This entitlement is set out at regulation 13A WTR. This means that in total, UK workers are entitled to 5.6 weeks' statutory annual leave inclusive of bank holidays. Any holiday over and above this will be a contractual entitlement.
Econ Engineering Ltd v Dixon and Others
The Claimants were eligible for a monthly profitability bonus, calculated as a variable uplift on their hourly rate for the past month. The bonus was dependent both on the performance of individuals and on the overall performance of the company. It was not therefore automatically payable every month.
The Claimants alleged their holiday pay should include the profitability bonus. They were successful at the Employment Tribunal (ET) and the Respondent appealed to the EAT. The Respondent accepted the profitability bonus should be included within regulation 13 leave as it was part of 'normal remuneration' under EU law. However, it argued the bonus should not be included in the additional 1.6 weeks' statutory leave regulation 13A.
In order to reach a determination, the EAT needed to consider the statutory definition of a week's pay under section 221(2) Employment Rights Act 1996 (ERA). It held the definition of a week's pay contemplated a fixed sum payable as a matter of legal obligation, for the completion of the required number of working hours in a given week. In contrast, a profitability bonus is contingent on the company hitting the profitability targets and will vary according to how successful the business has been in a given month. The profitability bonus therefore fell outside the scope of the definition of a week's pay, and also outside the scope of regulation 13A.
What Can Employers Learn?
Whilst this case relates only to the 1.6 week domestic statutory annual leave entitlement, it could have significant financial implications for employers. The decision demonstrates the importance of considering each element of pay separately in order to determine whether it should be included within holiday pay calculations.