It is widely reported in the press that the employee-owned John Lewis Partnership has admitted that it has miscalculated holiday pay for at least seven years. As a result the company is to pay out £40m to compensate 69,000 workers next month.
The error relates to how holiday pay was calculated. The company had been basing its holiday payments only on the contracted weekly hours for staff; this failed to reflect the premiums its staff were entitled to for Sunday hours or working on Bank Holidays, for example, as required under the Working Time Regulations 1998 (WTR).
This highly publicised case perhaps highlights the need for the WTR to be simplified. That such a large employer had fallen foul of the legislation serves to demonstrate the difficulties of calculating holiday pay. Indeed, the process of calculating holiday pay is made all the more difficult given that recent case law has ruled the legislation is to be interpreted purposefully in line with EU law, so that the regulations should not be applied as literally written.
The employment tribunal ruled in favour of a purposive interpretation to the legislation on holiday pay recently in the case of Neal v Freightliner Limited ET/1315342/12. In the case, the employment tribunal was required to consider whether employers should calculate holiday pay on employees’ actual remuneration, to include overtime payments, or their basic salary alone.
The arguments centred around Regulation 16 of the WTR which states that statutory holiday pay is to be calculated using the “week’s pay” provisions of the Employment Rights Act 1996 (ERA). These provisions state that periods of voluntary overtime and overtime premiums are to be disregarded. The employer had therefore calculated statutory holiday pay with reference to the employee’s 35-hour basic salary only.
However, the employee claimed that holiday pay had to be calculated with reference to his pay for all hours worked, including weekend work, night work and overtime following Williams and others v British Airways plc  IRLR 948. It was held in Williams that the WTR should be read in line with EU law. Therefore workers should be entitled to receive their “normal remuneration” that includes remuneration “intrinsically linked to the performance of the tasks” that they are required to carry out under their contracts, such as overtime, in addition to their basic salary.
In reply, the employer argued that the Williams case only impacted upon compulsory and not voluntary overtime and therefore was not applicable to the facts of this particular case. However, the judge reasoned and held that the employer should have taken all the worker’s overtime payments into account, voluntary or otherwise. Accordingly, the employee’s basic pay, overtime hours and premiums should all have been included in his holiday pay calculation.
The judge decided that the Regulation 16 should be read as though words had been added to exclude the week’s pay provisions of ERA that state that voluntary overtime and overtime premiums are to be disregarded – that is the legislation should be interpreted purposively to accord with EU law.
Although the tribunal decision is not binding, and the employer has lodged an appeal, it does follow the Williams case which was heard by the Supreme Court.