The recent Court of Appeal’s decision in Lock v British Gas has created renewed interest in the vexed question of how much you have to pay your staff when they take a holiday.  We set out the basic principles and offer advice on how to tackle this issue and minimise cost and risk to your business.

1  Holiday pay should reflect a worker’s normal pay

European case law has made it clear that workers’ should not be discouraged from taking leave and that their holiday pay should generally correspond to what they would have received had they been at work.

The Working Time Regulations (WTR’s) require that certain types of worker are entitled to be paid “normal remuneration” (rather than simply basic pay) when they take a holiday.  These include workers who do not have normal working hours, work shifts, or are piece workers.  Their holiday is calculated by reference to all of their taxable earnings over the previous 12 weeks and this will include any overtime worked or commission received. 

However, the WTR’s specify that workers with normal working hours (such as the traditional 9-5) whose pay does not vary with the amount of work done, are only entitled to be paid by reference to their basic pay when they take a holiday.  Non-guaranteed overtime, commission payments and allowances are not included. 

This anomaly has been challenged in a number of cases and we now have a very clear idea of how much these types of workers are entitled to receive by way of paid holiday.

2  All regularly worked overtime should be included

The EAT has determined that non-guaranteed overtime (which the worker is contractually obliged to accept if offered) must be included if it is regularly worked. 

There are no binding decisions about purely voluntary overtime, but evidence from recent Tribunal decisions suggests that the courts are moving away from the “label” attached to the type of overtime worked.  If overtime (of whatever nature) has become part of a worker’s normal pay, it is likely to have to be included in their holiday pay.

There is no guidance about what sort of working pattern is regular enough to be included, but Tribunals have held that overtime worked “week in week out” (Hertel and Bear Scotland) and “every Saturday”  (Brettle and others v Dudley Metropolitan Borough Council) should be included. 

What is less clear, is whether workers who work overtime at regular times of the year (such as over the Christmas period) will also be able to include this in their holiday pay calculations and we expect further challenges on different working arrangements.

Purely “ad hoc” overtime does not have to be included.    

3  Commission

Workers are entitled to have “results based commission” included in their holiday pay, probably calculated by averaging their pay over a 12 week period and should not be otherwise be financially disadvantaged when they take a holiday. 

Not all workers earning commission will be entitled to have these payments included.  So far, we only have a binding decision on a commission scheme that was purely assessed by reference to the worker’s own efforts and made up approximately 60% of his salary (Lock v British Gas). 

Workers must be able to demonstrate that they have suffered a loss by taking a holiday.  This will be much more difficult to prove where commission (or even bonuses) are paid less regularly, involve discretionary elements or are not based solely on the worker’s own contribution. 

We expect to see workers seek to widen the scope and argue that other types of commission schemes or bonuses should also be included.

4  Allowances

Allowances should be included in holiday pay to the extent that they are linked to a worker’s productivity or work.  Travel or subsistence expenses do not have to be included (Hertel and Bear Scotland) but out of hours standby payments and call out allowances that are regularly paid should be included.  In Brettle payments had been made one week in every four or five and were included.

As a rule of thumb, taxable allowances that can be distinguished from payments that purely reimburse expenses should be included in the calculation.

5  Overtime, commission and allowances only have to be included in 20 days paid holiday

Businesses can lawfully distinguish between holiday payments made for the first 20 days taken each year, from all other statutory and contractual holiday (“Directive leave”).  A worker’s holiday pay should include all overtime, commission and allowances for the first 20 days, but after that businesses can reduce this to basic pay.

6  Impact of Brexit

The UK will continue to be bound by EU laws until another agreement is reached or we unilaterally withdraw from the EU (which cannot be earlier than 2 years from the date the exit notice is served).  This means that the laws and judicial interpretation of those laws about working time and holidays will continue to apply to businesses. 

However, the Government has recently announced that it intends to end the jurisdiction of the ECJ in the UK and, next year, will introduce the “Great Repeal Bill”.  This will end the authority of EU law by converting all of its provisions into UK law on the day we exit. 

This will not mean that all of our employment laws fall away, but the intention of the legislation appears to be that ECJ interpretations (based on Directives) will no longer bind our UK courts and Tribunals.  That is likely to have a profound effect on holiday pay cases and businesses that have not already changed their holiday pay policies may, in the future, be able to avoid doing so and instead rely on the strict wording of the WTR’s.