There have been a number of cases over the last few years concerning the calculation of holiday pay. InWilliams and others v. British Airways plc (Case C-155/10) the European Court of Justice (ECJ) held that pilots' holiday pay entitlement under the Aviation Directive (2000/79/EC) should not be limited to basic salary but must correspond to "normal remuneration". Therefore, pilots should be entitled to holiday pay in respect of:

  • remuneration that is linked intrinsically to the performance of tasks which they are contractually obliged to perform;
  • payments that relate to their professional or personal status.

Williams concerned the Aviation Directive and not the Working Time Directive(2003/88/EC). However, the ECJ ruled that the same principles apply to each.

In the subsequent case of Lock v. British Gas Trading Ltd (Case C-539/12) the ECJ applied its earlier decision in Williams to the Working Time Directive. It held that:

  • holiday pay under the Working Time Directive cannot be calculated based on basic salary alone where a worker's remuneration includes commission determined with reference to sales achieved;
  • if commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave, since no commission will be generated during their holiday period. In such circumstances, the worker might be deterred from exercising the right to annual leave, which would be contrary to the Directive's purpose.

On 4 November 2014 the Employment Appeal Tribunal (EAT) handed down its judgment on three highly important test cases concerning the calculation of holiday pay: Bear Scotland Ltd and Others v. Mr David Fulton and Others UKEATS/0047/13/BI; Hertel (UK) Ltd v. Mr K Woods and Others UKEAT/0160/14/SM; Amec Group Ltd v. Mr Law and Others UKEAT/0161/14/SM.

The common issue in these cases was whether the employers had made unauthorised deductions from wages by failing to include overtime and other allowances in calculating the employees' holiday pay.

The EAT ruled that:

  • holiday pay must include overtime (including non-guaranteed overtime) and other allowances if they are "intrinsically linked to the performance of the tasks", because these form part of the "normal remuneration" that a worker is entitled to be paid as holiday pay;
  • workers could not claim any consequent holiday underpayment as forming part of a series of deductions of wages where more than three months had elapsed between the "deductions" (the periods of holiday).

The EAT has given leave to appeal to the Court of Appeal, so the position is still far from certain. There is a real risk that if an employer continues to pay basic pay only for holiday pay, where an employee's normal remuneration includes elements other than basic pay (such as overtime, commission and bonuses), it will be making an unlawful deduction from the employee's wages. There is of course real concern also about back claims, but these concerns have been alleviated to some extent by the EAT's position on a break in deductions.

Business Secretary, Vince Cable, has announced that he is setting up a taskforce to assess the impact of the judgment.