Under English law, all workers1 receive 5.6 weeks of paid holiday every year. This is 28 days for a full-time worker working a five-day week—already generous when compared with vacation globally. Four weeks of this holiday comes from European law, while the extra 1.6 weeks is UK specific.
Traditionally holiday pay has been a worker's basic rate of pay for those with normal working hours (plus guaranteed contractual overtime). However, European cases have already decided that workers must receive their "normal pay" during their holiday. This is not always just a basic pay rate.
In November 2014, the UK Employment Appeal Tribunal looked specifically at overtime payments, with potentially expensive results. It also decided how far back workers could claim they have been underpaid holiday pay by their employer in the past.
The decision reiterated that workers with normal working hours must receive holiday pay that is equal to the pay that they "normally receive". This does not mean looking at the normal working hours in an employment contract. Where a person has a settled working pattern that includes compulsory overtime (i.e. overtime that a worker must work if their employer offers it), employers must include these overtime payments when calculating holiday pay. The judge accepted that, for a payment to be "normal", a worker must receive a payment for a sufficient period of time. One new battleground in the future will be how often a worker must work overtime for it to be "normal". One-off or ad hoc overtime arrangements will not be caught, but the dividing line will be fact-specific.
The judge did not specifically address voluntary overtime (overtime a worker could refuse to work). It is likely that tribunals will deal with this overtime in a similar way (i.e. a settled pattern of voluntary overtime will be treated as normal pay). The ramifications of this case will not end there. Unions in particular eagerly awaited this decision. There will be further cases on what other pay and allowances employers must include when setting holiday pay. Arguments around bonuses are likely to be key.
Employers should not underestimate the potential effects of the decision. The government has previously estimated that some five million workers may not have been receiving enough holiday pay to meet the new rules. Soon after this decision, the government announced it was setting up a task force to assess the ruling and to discuss how to "limit its impact" on businesses.
The recent decision also looked at backdated claims. Workers can bring a claim for an unlawful deduction from their wages if they have been underpaid for their holiday, but they must do so within three months of the underpayment (i.e. the holiday). A worker can also claim for a series of deductions for the same kind of underpayment. These claims must be brought within three months of the most recent underpayment. There was concern that these claims could extend back to 1998, the year the rules came into force. Helpfully the judge decided that a break of more than three months between underpayments broke the "series". This significantly reduces the potential liability for historic claims. Although the judge gave permission to appeal, the relevant union has since suggested that it does not currently propose to appeal this point. There is a risk of breach of contract claims but only where an employment contract has incorporated the relevant statutory rules (and this is rare).
Obviously this presents potentially a significant financial liability for employers with staff who currently work a lot of compulsory (or potentially regular) overtime, but are only paid basic pay while on holiday. Previous cases have decided that pay intrinsically linked to tasks a worker must perform (i.e. commission) and pay linked to professional status should also be included. Strictly, all these decisions only apply to the minimum four weeks' holiday under European law. However, it would likely be difficult to make a distinction for payroll purposes in practice. Employers should assess their current holiday pay arrangements, with a particular focus on employees' overtime patterns, commission, allowances and bonuses. They can then assess what risk and financial liability they face, for both holiday pay in the future and historic claims.