Most of the case law surrounding the calculation of statutory holiday pay is concerned with what elements of pay are to be included. Hein v. Albert Holzkamm, however, also addressed the question of what period should form the basis of the calculation of normal pay.
Mr Hein was employed by Holzkamm as a concrete worker. In 2015, Mr Hein was working short-time and did not perform any actual work for 26 weeks. However, as would be the case in the UK, the employment relationship continued throughout this period.
During the course of his employment, Mr Hein was under a collective agreement with Holzkamm, which provided that holiday pay would be paid on the basis of a 13-week average calculation, in accordance with a long-standing provision of national law in Germany. When he took his holiday (including the four weeks required under the Working Time Directive) Mr Hein's holiday pay was therefore calculated on the basis of average pay over the period of short-time working, so excluding overtime for example, meaning that it was lower than his normal pay while working.
Holzkamm's reason for using average pay in its calculation was that German law, although requiring the calculation of holiday pay to be based on normal pay in line with recent European cases, allowed for the possibility of derogation by a collective agreement.
The Court of Justice of the European Union (CJEU) held that this breached EU law in respect of the four weeks' paid holiday guaranteed by Article 7(1) of the Working Time Directive. It held that a guaranteed four weeks' paid leave was necessary for health and safety purposes and enabled workers to take their holiday entitlement without losing out financially. The CJEU concluded that German legislation, in allowing for collective agreements to take into account reductions in earnings due to short-time working for calculating holiday pay, was incompatible with EU law.
However, the CJEU also highlighted that the right to accrue annual leave arises from actual work. The object of allowing a worker to rest assumes that the worker has engaged in work from which they should be given a rest in order to protect their health and safety. Accordingly, annual leave would not accrue under the Directive during periods when no work was carried out. Instead, the CJEU directed that holidays under the Directive should be calculated by reference to periods of actual work completed under the employment contract. So, after 26 weeks of not performing any actual work, Mr Hein would only accrue two weeks' holiday under the Directive.
The Court emphasised that this does not prevent member states from applying more favourable provisions under national legislation for the benefit of workers, so long as member states do not breach minimum health and safety requirements in relation to the organisation of workers' working time. Therefore, holidays under the UK Working Time Regulations will continue to be based on the period of employment, not on how much of that period the employee was actually working.
The CJEU went on to briefly consider overtime as part of its judgment. It, unsurprisingly, concluded that pay for the four weeks' annual leave provided for under the Working Time Directive should not be lower than the normal pay received by the worker during periods of actual work. Therefore, the Working Time Directive precluded national legislation from allowing collective agreements to provide that reduced earnings (for example, because of short-time working during the reference period) could be taken into account when calculating holiday pay.
The CJEU highlighted that, if overtime is exceptional and unforeseeable, the resulting overtime pay does not form part of "normal remuneration" for holiday pay purposes – which is consistent with the now largely accepted position in the UK. However, the CJEU contrasted this with compulsory overtime (where "obligations arising from the employment contract require the worker to work overtime") where overtime pay would be part of normal pay.
Although it is not clear from the decision that such a sharp distinction was intended, it could mean that one of the conditions that has to be satisfied before overtime pay must be taken into account is that the worker's contract requires them to work overtime. This distinction could lead some to seek tore-open the question of whether voluntary overtime should count as normal pay for these purposes.
It appears that a case dealing with this point, Flowers v. East of England Ambulance Trust, has been appealed and will be heard by the Court of Appeal this year. We will provide further updates on this point in due course.
Implications for employers
Holiday pay calculations can be tricky enough for employers, even without the added complications of considering irregular hours, shift patterns and seasonal variations in the demand for work. The government has recently indicated that the reference period for the calculation of holiday pay may be increased to 12 months following the recommendations resulting from the Taylor Review.
However, the clearest message coming from this case is that, while there is a lot of flexibility at a national level to govern how much holiday a worker can accrue and how much they will be paid for that holiday:
holiday pay must be based on normal pay earned when actually working; and
some long absences may stop the accrual of holiday under the Directive, but beware discrimination arguments and accrual under national law.
This decision does not immediately change the position on holiday pay in the UK. When in doubt in calculating holiday pay, employers should make every effort to seek clarification to ensure that they are compliant with national and European legislation, since a failure to comply could be costly.