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One Size Fits All: Choosing the right referencing period for holiday pay calculations

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.

The courts noted that the amount of work and the payment for it may fluctuate. 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. 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.

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.

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 decide what a reasonable reference period is for calculating holiday pay, where pay fluctuates. LouiseAHeadShot

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.

By Louise Addison

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