As the dust begins to settle following the judgment of the Employment Appeal Tribunal in the case Bear Scotland v Fulton, one key question for employers is how to determine what a reasonable reference period will be for calculating a week’s holiday pay.

It seems clear that at least some types of overtime pay and some forms of commission payment as well as payments for aspects of a job which are inconvenient, must be included in the calculation of holiday pay. The courts have pointed out these types of payment must be included in the calculation if the payments are:

  • intrinsic to the work done
  • for an aspect of the work which inconveniences the employee
  • in respect of work which is part of a regular work pattern.

The courts also noted that both the work and the payment for it may fluctuate: there will be busy times with significant overtime, and quieter times with little or none.

Such fluctuations will be common in some industries, so selecting a period of time for the calculation of average pay will be crucial. For example, local garden centres and nurseries may require far more hours from their employees at Christmas or in the busy spring planting season, but few in the months of January and February. Patterns of work and pay associated with them, while predictable and anticipated, will differ significantly from one part of the year to another.

When determining what a reasonable reference period will be in these cases, employers will have to make decisions about which weeks of work are used to calculate average or usual pay. While the courts agree the reference period for calculating pay will be a matter for national courts and EU member states to decide, the judge in the Bear Scotland case suggested that employers may have some discretion on the matter, but any period they select must be reasonable.

The present mechanism for calculating a week’s pay where there are no normal working hours is set out in the Employment Rights Act 1996 (Section 124). It uses a fairly rigid formula based on the average wage of the 12 weeks immediately preceding the calculation date. Will this be appropriate for calculating pay for working time directive holiday (four weeks out of the 5.6 weeks due under the UK’s working time regulations)? The answer to this will probably depend on work patterns in that particular industry, and may be a good starting point.

However, there are obvious problems with this approach. To begin with, any reference period must be fair to the worker so it does not act as a disincentive to taking holiday, and it shouldn’t lead to workers being treated differently depending on when their holiday is taken. Employers (and employees) will not want a situation where leave taken at some points is always paid more than leave taken at other times.

For the local garden centre in our example, a 12-week reference period could lead to holiday taken immediately after the busy Christmas or spring period being better paid than holiday taken following a quiet period later in the year. In such cases, an annual or six-month reference period may be more appropriate.

Organisations will need to be a careful to avoid discrimination. Employers should consider issues such as fixed religious holidays, and the need to take annual leave to fit around childcare commitments, as well as the key question of whether or not all employees will be able to take holidays at a time that suits them.
Until further guidance is forthcoming, either from the courts or as a result of a government review, the practical advice must be for employers to do two things at least:

  • assess whether or not there are any payments made which will obviously and unarguably have to be included in holiday pay in the future
  • decide what a reasonable reference period is for calculating holiday pay, where pay fluctuates.

A one-size-fits-all formula would not seem appropriate, given the nature of industry-specific work patterns. A well-reasoned and fair policy will be welcomed by a workforce as providing certainty, and may form a useful basis for negotiation and the avoidance of claims.

Catherine Rayner and Elaine Banton are barristers at 7 Bedford Row specialising in employment and discrimination law

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