Econ Engineering Ltd v Dixon

For section 221(2) of the Employment Rights Act 1996, a payment is included in a week's pay only where the employee working throughout normal working hours is both a necessary and sufficient condition of entitlement.

A payment calculated by reference to the employer's profitability is not included merely because it is expressed as an hourly supplement for hours worked. It is excluded where entitlement also depends on an external condition, such as the business meeting profitability targets. The statutory calculation date fixes the contractual terms to be identified; later changes are irrelevant.

Employees claimed that a contractual profitability bonus should be included in holiday pay for leave under regulations 13 and 13A of the Working Time Regulations 1998. The Employment Tribunal held that the bonus fell within section 221(2) of the Employment Rights Act 1996 and should be included for both types of leave.

The employer appealed to the Employment Appeal Tribunal. The appeal concerned the construction of section 221(2), particularly whether the bonus was payable if the employees worked their normal hours in a week, despite entitlement depending on monthly profitability targets.

1. Appeal allowed. The Employment Tribunal had erred in law in including the profitability bonus in the calculation of a week's pay under section 221(2) of the Employment Rights Act 1996. The EAT substituted a declaration that the bonus was not to be included. Remission was unnecessary.

2. Under section 221(2), the tribunal must identify the employee's contractual entitlement at the relevant calculation date. For annual leave, regulation 16(3) of the Working Time Regulations 1998 makes the first day of leave the calculation date. The contractual terms are fixed at that date, so subsequent changes do not affect the calculation.

3. The words requiring identification of sums payable if the employee works throughout normal working hours refer to sums payable as a matter of legal obligation where that obligation arises simply because the employee has worked those hours. Completion of normal working hours must be both necessary and sufficient for entitlement.

4. Basic pay satisfied that test. The profitability bonus did not. Although it was calculated as an hourly supplement for hours worked, it also depended on the business achieving specified profitability targets and varied with monthly business performance. Working a given hour was therefore necessary but not sufficient to create entitlement.

5. The reference to “a week” supported the conclusion that section 221(2) contemplated a fixed payment payable week in, week out, but this was not decisive. The decisive consideration was the legal condition governing entitlement.

• Employment Tribunal: Employment Judge Cox held, on reconsideration, that the profitability bonus should be included in holiday pay under regulations 13 and 13A of the Working Time Regulations 1998.
• Employment Appeal Tribunal: Appeal allowed. The EAT substituted a declaration that the bonus did not fall to be included under section 221(2) of the Employment Rights Act 1996.