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Holiday pay: Should a profitability bonus be included in holiday pay calculations?

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By Ceri Fuller & Hilary Larter


Published 06 August 2020


The EAT has held that a profitability bonus should not be included in holiday pay for 1.6 weeks’ of the workers’ statutory holiday entitlement.




The Facts

Six employees of Econ Engineering Limited brought a claim for unlawful deductions from wages in respect of their holiday pay. The wages for these employees were paid weekly and based on an hourly rate. They were also paid a profitability bonus, monthly in arrears. The profitability bonus took the form of a supplement payable in respect of each hour they had worked in the preceding month. It was calculated on the basis of annual targets set by the employer and by reference to the business' total profit for the month. The bonus could vary from month to month and could even be nil. The employees claimed that the profitability bonus should be included in the calculation of a weeks’ pay, on which statutory holiday pay is based. The employment tribunal upheld their claim.

Under the Working Time Regulations (which is the UK legislation implementing the Working Time Directive (WTD), which is European legislation), workers are entitled to 1.6 weeks’ holiday in addition to their four week entitlement under European legislation. Workers in the United Kingdom are therefore entitled to 1.6 weeks’ more paid holiday than that to which they are entitled under European law. Econ appealed to the EAT in respect of the holiday pay relating to this additional 1.6 weeks’: the question of whether the payment fell to be included in the WTD four week entitlement was not appealed.

The EAT upheld the appeal. It considered that the wording in the Working Time Regulations dealing with this 1.6 week period relates to sums legally payable simply because the employee has worked their normal working hours in a week. However, the profitability bonus was also contingent on the company hitting a profitability target: it was not simply based on normal working hours. Given the wording of the legislation, the profitability bonus did not therefore count towards holiday pay in respect of the additional 1.6 week holiday entitlement.


What does this mean for employers?

Calculation of pay for the statutory holiday entitlement continues to be a complicated area. A forensic assessment needs to be made of each element of pay to establish whether it is intrinsically linked to the hours worked by a worker in their role. Where an element of an hourly paid employee’s pay relates to something other than hours worked (for example, the company’s performance) this element of a worker’s pay will not be taken into account in respect of 1.6 weeks’ of their holiday pay.

As the question of whether the payment fell to be included in the four week WTD entitlement was not appealed, there remains conflicting case law at employment tribunal level about whether bonuses unrelated to an individual’s performance of their role have to be included in that four week entitlement but our view is they do not need to be. There will no doubt be more case law on this issue, especially exploring where to draw the line between individual and company related bonuses.

Econ Engineering Ltd v Dixon and others [2020] UKEAT/285/19