The John Lewis Partnership has announced that it will make a one-off payment of £40m to compensate staff after discovering an error in the way it has calculated holiday pay for those working Sundays and Bank Holidays over the past seven years.
Payments to staff will depend on shift patterns and pay grades but it is anticipated that more than half of the 69,000 staff affected across the John Lewis and Waitrose stores will receive £120 or less. It is reported that others may receive payments of up to £4,000. Although it is not yet known exactly how the underpayment came about it appears to be an issue related to the fact that staff working Sundays and Bank Holidays received a higher rate of pay on these days and this was not factored in to the calculation of their holiday pay.
The entitlement to paid annual leave, at the rate of a week's pay for each week of leave, is set out in the Working Time Regulations 1998 (the "Regulations") and the calculation of a week's pay for these purposes is set out in the Employment Rights Act 1996 ("ERA"). There is also a growing body of case law interpreting how holiday pay should be calculated and whether it should include other factors such as bonus payments, commission, overtime payments and shift premiums.
In the case of British Airways plc v Williams and ors 2012 ICR 1375, SC the Supreme Court held that holiday pay must correspond to a worker's normal remuneration and should take into account payments which are 'intrinsically linked' to the performance of the tasks which the worker is required to carry out under his or her contract of employment. This case construed the Civil Aviation (Working Time) Regulations to disapply some of the wording of the ERA in relation to the calculation of holiday pay. However, the Employment Tribunals now appear to be applying this decision more widely and the recent Employment Tribunal case of Neal v Freightliner Ltd held that an employee was entitled to have overtime and shift premiums taken into account when calculating holiday pay. This case has been appealed to the Employment Appeal Tribunal.
This case acts as a useful reminder of the complexities of the working time and ERA rules relating to holiday pay and of the need for all employers to regularly review their systems and holiday pay calculations. For more information on calculating holiday pay, particularly in relation to regular shift premiums or overtime payments please contact a member of our team.