May Gurney Ltd -v- Adshead
Section 221(3) of the Employment Rights Act (ERA) says that if an employee's pay for normal working hours varies with the amount of work done, then a week’s pay is calculated at the average hourly rate of pay for the previous 12 weeks.
In May Gurney Ltd -v- Adshead (and 95 others), the employment appeal tribunal (EAT) said that both a variable and a fixed bonus should be included in the calculation of employees’ pay when working out holiday pay.
What were the basic facts?
The terms and conditions of the 96 claimants in this case were set out in their contract, as well as a collective agreement that determined how payment for annual leave should be calculated.
The agreement stated that, if an operative’s pay varied with the amount of work done, a week’s pay should be calculated by averaging the earnings for a normal working week over the 12 weeks worked immediately before the holiday week.
They were also entitled to two types of bonuses (one fixed and one variable). The latter varied depending on whether the employee worked in the mainline or district section.
The claimants argued that their bonuses should be included as part of their pay for calculating holiday pay.
What did the tribunal decide?
The tribunal decided that the variable bonus should be taken into account when calculating holiday pay, because it was essentially a productivity bonus. As a result, the amount of a week's pay did vary with the amount of work done.
They also decided that the fixed bonus was part of the weekly wage in the sense that it formed part of the pay that an employee would inevitably receive as long as they turned up for work.
The tribunal therefore concluded that the employers had not made the appropriate calculation for holiday pay, in that they had ignored both these bonus elements.
What did the parties argue on appeal?
The employer argued that the tribunal had failed to understand the differences between the two variable bonuses. If it had done a proper analysis of the district bonus arrangement, it would have realized that pay did not vary with the amount of work done. Instead, employees had to reach a threshold before the bonus kicked into place.
In addition, they said that the bonus payable depended on a number of factors unrelated to the efficiency of the workers. All this, they argued, showed that there was no direct correlation between the amount of work done and the pay received.
Not surprisingly, the claimants argued that the productivity arrangement was one where pay clearly did vary with the amount of work done, not least because employees received extra reward for achieving a greater level of output within a fixed period of time.
And in any event, they said that holiday pay should be calculated by taking into account any arrangement that can properly be described as a productivity bonus arrangement, whether the pay varied with the amount of work done or not.
What did the EAT decide?
The EAT rejected the employer’s argument that, just because the same level of performance could lead to different output, this meant there was no direct correlation between work and pay. It said that, to a greater or lesser extent, that would almost always be the case.
Nor did they agree with the employer’s argument about the threshold level. It said that, although pay was the same until the threshold was reached, it was still the case that, once a certain level of performance was achieved, then the pay varied with performance.
As for the fixed bonus, the EAT said that, since the fixed bonus was part of weekly pay, it should also be included in the calculation for holiday pay.