How Has The Calculation Of Holiday Pay Changed?

December 16, 2014

There have been two recent decisions of the courts on the calculation of holiday pay. This blog considers how these affect employers.

In the UK, the Working Time Regulations 1998 says that all employees must have at least 5.6 weeks holiday, which is 28 days’ holiday for an employee working 5 days a week, but employers can offer more. The 5.6 weeks includes 4 weeks of holiday that the European Union says that all employees must be allowed to take.

Until recently, for most employees with normal working hours, holiday pay was based on their normal basic salary, plus any guaranteed overtime, which is overtime that an employer has to offer to the employee and the employee has to work. But, holiday pay didn’t include any non-guaranteed overtime, commission or bonus. This is changing.

The changes began with a decision by the UK Supreme Court, following a ruling by the European Court of Justice (ECJ), the EU’s highest court, which said that normal pay for holiday should include all the essential elements of an employee’s pay that are directly linked to the performance of their role.

In May this year, the ECJ said that where commission is a significant part of an employee’s pay, the employee’s holiday pay should include an element to reflect that commission. This ECJ ruling now has to be considered by an employment tribunal, which will decide whether the Working Time Regulations allow the calculation of holiday pay to include commission. Until that decision, which will not be before February 2015, there is no requirement to include commission in holiday calculations.

More recently the Employment Appeal Tribunal (EAT) considered the issue of holiday pay and non-guaranteed overtime, which is overtime that an employer doesn’t have to offer employees, but if it does, the employee has to work it. The EAT said that non-guaranteed overtime should be included in the calculation of holiday pay. However, this only applies to the 4 weeks’ holiday that the EU says that employees must have, not the additional 1.6 weeks that UK employees are entitled to or any extra holiday offered by employers. It also does not apply to voluntary overtime, which is overtime that an employee does not have to work if it is offered.

The EAT’s decision means that many employees who work non-guaranteed overtime are likely to have been underpaid for past holiday. But the EAT said that past claims stop where there is a gap of 3 months or more between any underpayments. So if there was 3 months or more between an employee’s holiday dates or between them taking the 4 weeks’ EU element of their holiday, they won’t be able to bring a claim from before that 3 month period.

 

holiday underpayment

 

So what should employers do now?

  1. Include non-guaranteed overtime in the calculation of holiday pay, at least for the first 4 weeks of an employee’s holiday entitlement, and amend holiday policies to reflect this.
  2. Paying different rates of holiday pay may be difficult to manage administratively, so consider whether to include non-guaranteed overtime in all holiday pay or change overtime policies to make it voluntary, subject to any contractual issues – although this may be a short term solution as voluntary overtime may be the subject of the next legal challenge in relation to holiday pay.
  3. Review other regular payments to employees, including commission, as some or all of these may have to be included in holiday pay by 2015. Consider changing payment arrangements and make provision to meet additional holiday pay obligations.
  4. Assess liability and risk for past holiday underpayments. Would any employees be able to bring a claim in the employment tribunal? Are employees likely to bring claims? Consider how to deal with any claims.

 

Louise Paull – LawBite Employment LawBrief. For further legal advice you can contact Louise via our online legal advice portal.

 

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