The legal context
Following the introduction of the European Working Time Directive, Member States of the European Union were required to introduce their own legislation to ensure compliance. In the UK, the Working Time Regulations 1998 were introduced to ensure the right to a minimum amount of paid annual leave. For many years the right was to four weeks' annual leave. However, this increased to 4.8 weeks' leave from October 2007, and then to 5.6 weeks' leave from April 2009. The eight public holidays can be included within the 5.6 weeks' leave.
An employer is responsible for ensuring that employees take their holiday entitlement. The Working Time Regulations 1998 were originally based on the requirement to ensure the health and safety of employees - and having adequate rest means that employees are less likely to have accidents.
Employees are entitled to receive a sum equivalent to a week's pay for each week of leave and this is based on the basic week's pay. Non-contractual overtime, for example, is not included in the calculation of holiday pay. A recent Employment Appeals Tribunal ruling has raised questions about how far holiday pay should be reflective of ‘normal pay’ and exactly what should be included in the calculation. Following that ruling – which did not provide absolute clarity on what the formula should be – the Government has indicated its intention to legislate.
The engineering company has been struggling to survive over recent years, but has recently received a large order. The owner of the company is delighted. The order results in enough work to keep the organisation busy for the next nine months.
However, to secure the order the owner had to agree to some tight timescales. Now that the order has been won, the owner is trying to work out how this can be achieved.
There is a limitation on the output of the organisation, which is defined by the need to use certain machinery. It is possible to put shifts in place so that the machines are worked for 24 hours a day, but it is not possible to buy any new machines. They are extremely expensive, and the owner will lose all the profit that can be made on this order if he buys any new machinery.
So the owner has to work out how the order can be achieved on time using just the current machines.
There are 12 men operating the machinery. If 24 hour shifts are introduced, the owner will need to recruit three more operators to ensure that all the shifts are covered. This should mean, if there are no machine breakdowns, that the order is completed on time.
The owner of the company gathers the employees together to tell them about the new order, and to tell them that 24 hour shifts will have to be introduced to complete the order. The men are pleased to hear about the order, as they are all aware that work has been slow in recent times. Although there are a few moans about the 24 hour shifts, the men generally accept that this is necessary and are just pleased that there is work to be done.
The men are then told that none of them will be allowed to take any annual leave during the next nine months. The owner has worked out that all men will be needed at all times (with the additional three employees). If anyone takes holiday then the machines will not be operating at full capacity, so the order will not be achieved. The men are not happy with this.
One of the employees, Kevin points out that he has already paid for his two week holiday in Tenerife. He tells the owner that this has cost him £2,500 and he is not prepared to lose the money. The owner tells him that his 'wife and kids can still go' he will not lose all the money. Kevin is furious.
Steve is even more upset. He is getting married in five months' time, and has planned a two-week honeymoon (although he has not finalised the booking yet). The owner tells him that he has got a 'lifetime to take a honeymoon'.
Following the announcement
Once the meeting has ended the 12 men discuss what has been suggested. They decide that they are not prepared to forego their holiday. They work out that it would still be possible to keep the machines working at full capacity if one additional employee was recruited. They decide that they will put this to the owner.
At the same time, the owner is thinking about the conversation that has just taken place. He understands the reaction of the men and decides to put in place an incentive to encourage them to give up their holiday entitlement (they all receive the minimum entitlement of 5.6 weeks, and the eight public holidays are included within this).
He decides that he will pay the men a bonus at the end of the nine months, equivalent to the holiday that they have lost. So, for example, if one of the men has already taken one week's holiday during that holiday year, he will get a bonus of 4.6 weeks' pay. If one of the men has not taken any holiday during the year, he will get a bonus of 5.6 weeks' pay. He thinks that this will be sufficient to tempt the men away from taking their holiday entitlement.
The owner and the men meet again and they each put forward their suggestions. The owner immediately rejects the idea of employing another member of staff. He argues that it is too costly and that the time taken to train the additional employee would be excessive.
The men point out that he is already planning to recruit three additional employees and so question why recruiting four instead of three would be a problem. The owner simply says that the men 'don't understand', and he is not prepared to do it.
The owner, however, puts his idea to the men. He suggests to them that getting a bonus payment would be a reward for their loyalty, and would surely be worth working for. Immediately, Kevin asks what the cost will be of paying them all a bonus. He suggests that the cost of the bonus will not be significantly different to the cost of recruiting a new employee. The owner ignores the comment.
Some of the men are keen on the idea of the bonus. Matthew is currently single, and had no plans to go away on holiday that year. He has recently bought his first house, which requires a lot of renovation. The additional money is very attractive.
Others, such as Kevin and Steve, who have already got holiday plans, are not happy with the proposal (although the bonus is certainly attractive). It is agreed that everyone will go away and think about the proposals and meet again the following day.
Consulting with trade unions
Kevin is a member of a trade union, and when he gets home that evening he phones the trade union helpline. He wants to know whether the owner is legally entitled to refuse to allow any of the men their full holiday entitlement for the year. He does not mind foregoing some of the holiday entitlement, but he does want to take the two weeks to go on the holiday that he has already paid for.
The trade union representative looks up the detail of the Working Time Regulations 1998. She finds that regulations 13 (9) and 13A (6) clearly state that the leave allowance cannot be replaced by a monetary payment in lieu. The only situation where it is allowed is when the employment has been terminated, and any outstanding holiday entitlement is paid to the employee. The trade union representative is also aware that Employment Tribunals have considered the fact that there should be no disincentive for employees to take annual leave. Her view is that by offering an incentive to those who do not take annual leave the employer is creating a disincentive for anybody to do so.
The trade union representative explains to Kevin that the whole purpose of the Working Time Regulations 1998 was to protect the health and safety of employees. The representative suggests that the plan to make the employees work for nine months without a holiday is not only a breach of the actual regulations, but also goes against the very purpose of the regulations and the principles of the European Working Time Directive on which they are based.
Having explained that the leave cannot be substituted by a payment in lieu, the trade union representative goes on to suggest that a solution could be carrying over part of the leave to the following holiday year. The regulations do not allow for the initial four weeks leave to be carried over. However, the additional 1.6 weeks that has been introduced since October 2007 can be carried over if there is a relevant workforce agreement. The trade union representative suggests that this might be a solution.
The next day Kevin goes along to the meeting with the owner and reports back what he has been told by the trade union representative. The owner is not happy to hear that his bonus idea is not allowed. He then gives consideration to the idea of carrying over part of the leave instead.
However, the owner decides that he does not want to have employees carrying over holiday to the next holiday year because he thinks that this will result in too much absence in the following year. He decides, therefore, that the only solution is to employ four additional employees instead of three and to allow all the men to take their leave.
Matthew then asks if the offer of a bonus is still there. He has decided that the extra money would be very useful. The owner takes advice from an HR consultant and is told that he cannot make a payment in lieu in substitution for the holiday. Even though Matthew would like this to happen, he cannot do this.