Many employers will be aware of recent cases that have raised the question of how holiday pay should be calculated. 

Previously, the general position was that an employer could calculate holiday pay based on basic salary only. However, there is now case law to suggest that other elements should be included. Employers whose pay structures include overtime, commission or allowances on top of basic salary need to be aware of the recent changes.   

Earlier this year, the European Court of Justice gave judgment in the British Gas case*, which determined that commission earned on top of basic salary should be taken into account when calculating holiday pay. The rationale for this decision was that an employee should not lose out financially by taking their annual leave, otherwise they might be disincentivised from taking a break and this would be bad for their health and morale.  Therefore we now have a clearly established principle that payments additional to basic salary should be included in holiday pay. The problem is that there is no clear guidance about how this should work in practice. At the moment, there are still a lot of unanswered questions for employers, including:

  • Does European law require that all payments additional to basic salary be included in the calculation for holiday pay?
  • Is it possible to interpret the domestic law, the Working Time Regulations, to give effect to this requirement?  If it is not then it may be that the Regulations themselves are incompatible with EU law, in which case it is possible that the UK government would be liable for any claims for back-dated holiday, rather than employers. 
  • How should these payments be included in a calculation for holiday pay? Should employers continue to use the established period of 12 weeks as the reference period for calculating average earnings? Or would a longer reference period such as 12 months be appropriate?   
  • Should a requirement to include additional payments in holiday pay apply only to the 4 weeks holiday provided by EU law, or the full 5.6 weeks given under domestic law? 
  • How far back will employer’s liability for historic underpayment of holiday extend?  Would former employees be able to bring claims? 

We are currently awaiting a judgment from the Employment Appeals Tribunal on a number of cases dealing with the issue of overtime in holiday pay**. We hope that this will clarify some of the outstanding issues and we will issue a detailed article once the judgment has been published.