The Employment Appeal Tribunal (EAT) has held that a profitability bonus was not part of a week’s pay for a worker with normal working hours, and therefore not part of holiday pay. This was considered in the case of Econ Engineering Ltd v. Dixon and others  UKEAT/285/19.
Econ Engineering manufacture and hire out winter road maintenance vehicles.
The claimants were six of its employees who worked in various roles on the production side of the business. They were paid a weekly wage based on an hourly rate of pay. They also received shift allowances, pay for voluntary overtime and a profitability bonus paid monthly in arrears.
The profitability bonus took the form of a supplement for each hour they worked in the preceding month, whether worked as part of their basic hours or as overtime. It was not dependent on the employees’ performance, but rather on the performance of the business overall.
Econ Engineering argued that the profitability bonus was not required to be included in the calculation of the employees’ holiday pay.
The employees brought unlawful deduction of wages claims in the Employment Tribunal (ET). The ET held that the profitability bonus should be included in the calculation of their pay for annual leave under the Working Time Regulations 1998.
Econ Engineering appealed to the EAT.
The EAT’s decision
The decision turned on the wording of section 221(2) of the Employment Rights Act (ERA). This requires the inclusion of sums which are “payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week”.
The EAT interpreted this section to apply to sums which are payable by the employer under a legal obligation where that obligation arises simply because the employee has worked their normal weekly working hours. Completion of the normal working hours must be both necessary and a sufficient condition for entitlement to the relevant payment.
The profitability bonus was based on Econ
Engineering’s performance and varied depending on how successful the business had been in the relevant month. Therefore, the EAT found that the profitability bonus could not be a payment which arose simply because normal hours were worked. Completion of a given hour of work was necessary but not sufficient, in itself, to give rise to an entitlement to the bonus payment. Just because an employee worked a given hour, or even completed all their normal working hours in a week, did not give rise to an entitlement to be paid the profitability bonus.
Therefore, the EAT held that the profitability bonus was not a sum which falls to be included in section 221(2) ERA and so was not to be included in the calculation of holiday pay.
In recent years, case law has tended towards inclusion of overtime, commission, allowances and regularly paid bonuses as holiday pay. This case highlights that there will be occasions where elements which are normally paid, and which relate to the performance of normal working hours, do not necessarily form part of holiday pay. The question to consider in such cases is whether working normal hours is necessary and sufficient to give rise to entitlement? This question needs to be asked for each element of pay in order to determine whether that sum should be included in holiday pay calculations.