Changes to Holiday Pay Calculations

By Catherine Addley  |  Paralegal
Employment / Commercial

Is it about to become more costly for my business?

There have been a series of recent decisions regarding the calculation of holiday pay which has left many employers confused about how they should approach the calculation.

What is the entitlement?

All full time workers are entitled to a minimum of 5.6 weeks’ holiday each year, or 28 days inclusive of UK public holidays.  Four of those weeks are derived from European law following the implementation of the Working Time Directive (the Directive) into the Working Time Regulations 1998 (WTR) (regulation 13(2)(c)).

The rate at which holiday is payable is a “week’s pay” for each week of holiday, as defined by the Employment Rights Act 1996 (sections 221 to 224).  For workers with normal working hours, a “week’s pay” is generally calculated by reference to basic salary only.  The effect of this is that significant elements of actual remuneration are not taken into account for the purposes of calculating holiday pay.

The Decisions

There have been various decisions concerning whether the provisions of the WTR relating to holiday are compatible with the requirements of the Directive.

In a series of cases, including Williams & others V British Airways Plc [2011] IRL 948 and more recently in Lock v British Gas Trading Ltd and Others [2014] IRLR 648, it was held that holiday pay should be calculated by reference to the workers “normal remuneration over a representative reference period”.

In Bear Scotland Ltd and others v Fulton and others [2015] IRLR 15, the Employment Appeal Tribunal held that for those who work varying hours, with overtime, a calculation of the previous 12 weeks worked was necessary in order to calculate the average hours worked (the Reference Period) and therefore the pay due for every period of holiday.  Although less clear, regularly worked, voluntary overtime should be included when calculating a week’s pay.  The reference period is due to increase to 52 weeks in April 2020.

British Gas recently appealed against the Employment Tribunal’s decision in the case brought by Mr Lock relating to commission payments.  When considering the appeal, the Employment Appeals Tribunal followed the approach taken in the Bear Scotland case.  The EAT stated that the WTR can and should be interpreted to conform to the requirements of EU law to take into account commission payments when calculating holiday pay, so as not to leave the worker worse off for having taken holiday.

What payments should be included?

Employers are now required to calculate holiday pay by reference to a workers’ normal remuneration. It is likely that the following types of payments will amount to “normal remuneration” and should be taken into account when calculating holiday pay:

  • Overtime payments (including voluntary and non-guaranteed overtime if it is worked on a regular basis)
  • Commission payments
  • Payments or allowances made in relation to time spent travelling;
  • On call and standby payments
  • Acting up supplements
  • Any other regular payments

Bonus payments remain a grey area although many bonus payments will amount to “normal remuneration” and we would suggest you take legal advice before making such a decision.

Consequences of calculating holiday pay incorrectly?

Underpaid holiday can be claimed as a series of unlawful deductions. This means that workers can claim backdated holiday provided that their claim is submitted within 3 months of the final deduction and there has not been a period of more than 3 months between each deduction. For claims brought on or after 1 July 2015, holiday pay can only be claimed for a period of 2 years. Where there are on-going deductions resulting from underpaid holiday, workers can submit further claims without being obliged to pay employment tribunal fees.

Once an employer begins paying holiday at the correct rate and continues to do so, the series of deductions will be broken and workers will only have a limited period to lodge their claims.

What should you do now?

Employers should consider:

  1. The payments workers receive in addition to basic salary to establish potential liability for underpaid holiday and whether any changes should be made to holiday pay calculations. For employees with settled working hours, consideration will need to be given to an appropriate reference period and differentiating between the first four weeks of holiday which must be paid by reference to “normal remuneration” and the additional 1.6 weeks which can be paid at basic rate.
  2. If changes are needed, the nature of those changes and how those changes should be made. There are dangers associated with making changes to the way that holiday pay is calculated and businesses should consider taking legal advice on an appropriate strategy.
  3. Whether the contracts of employment and employment polices require an update to reflect any changes.

How we can help

At Hansells we have a dedicated Employment team to deal with all types of employment matters.  Whether you are a large company, a small scale business or an employee, we can help.  We pride ourselves in taking a client focused approach; we will always make sure you fully understand the advice given and will strive to complete the matter within your desired timescales and in a cost effective manner.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice.

If you require any further information our Employment Team can offer legal advice and support. Please call us on 01603 751926 or email hr@hansells.co.uk.