Holiday pay: Are Bonus Payments Included?

Caselaw in relation to the calculation of holiday pay under the Working Time Directive continues to present challenges for employers as the concept of ‘normal remuneration’ develops on a case by case basis.  Based on current caselaw, the following elements of remuneration should be included in the calculation of holiday pay for the purposes of a worker’s 4 weeks leave entitlement under the Directive, assuming they are paid regularly or repeatedly over a sufficient period to count as normal remuneration:

• Commission payments
• Incentive or productivity/performance bonuses
• Overtime pay
• Payments that relate to the “personal and professional status” of workers
• Shift allowances and premiums
• Standby payments and payments for emergency call-out duties
• Travel and other allowances that are treated as taxable remuneration

Whilst the impact of overtime on holiday pay and resulting backpay claims have featured in caselaw and attracted public attention; bonuses remain a grey area and are likely to give rise to future litigation. On the one hand, bonuses are generally intrinsically linked to performance of some element of the worker’s contract and as such are liable to fall within the scope of ‘normal remuneration’ (it is rare to see a bonus that is entirely unrelated to past or future services, although a Christmas bonus paid equally to all staff, regardless of service, might qualify). On the other, it is difficult to see how a genuinely discretionary annual bonus can be said to fall within the scope of “normal remuneration”. If an annual bonus is based solely on company performance with no personal performance component, there is a strong argument that, provided there is no financial disincentive to taking holiday, it would not be included in the calculation of holiday pay under the Directive.

In Wood and others v Hertel (UK) Ltd and another ET/2603803/12 employees were entitled to an incentive bonus arrangement (known as “IBA”), comprising:

• A fixed element that related to hours worked but could be removed in the event of excessive absence etc
• A performance-based element paid if the employees reached agreed targets.

The Tribunal found that the IBA formed part of the employee’s normal remuneration for the purposes of calculating their holiday pay under the Directive. The tribunal rejected the employer’s argument that these bonuses were not part of normal pay and were not intrinsically linked to the performance of tasks the workers were required to perform under the contract. The tribunal also commented that the test is whether the payment is “intrinsically linked” to performance of tasks by the worker under their contract, not whether it is “exclusively” so.

If an annual bonus is included in holiday pay calculations, it also raises a further issue as to what the appropriate pay reference period should be when calculating ‘normal remuneration’. That is, an employee could potentially argue that in order to comply properly with the Directive, an employer must use a 52 week pay reference period when calculating ‘normal remuneration’ to ensure that an annual bonus is fairly reflected in their holiday pay as a rolling 12 week average could unfairly disadvantage and deter staff depending on when they take their leave during the leave year.

Whilst the legal position regarding bonuses has yet to be clarified, the direction of travel in the case law to date has been to encompass any form of performance related pay within the scope of holiday pay.  To this end there is a distinct possibility that annual bonus payments will also be brought within the scope of holiday pay calculations as the case law evolves and employers should take this into account when considering future bonus arrangements.

Louise McAloon is a Partner in Worthingtons Solicitors specialising in employment law. For legal advice in relation to the calculation of holiday pay, please telephone 028 90434015 or email [email protected].