Update on Calculation of Holiday Pay

Published byMartin Stephen

27th October 2016

Update on Calculation of Holiday Pay 

The long awaited decision of the UK Court of Appeal in British Gas v Lock was issued on 7th October but unfortunately does not provide the clarification we had all hoped for on the vexed question of how to calculate holiday pay.

Under the Working Time Directive workers have the right to four weeks “paid” annual leave.  The Directive gives no indication as to how the holiday pay should be calculated but in line with a number of recent cases it is clear that workers taking holiday in terms of the Directive are entitled to their “normal remuneration”.  This is calculated by a reference to basis salary and also any other form of remuneration which is “intrinsically linked to the performance of the tasks”.  The thrust of these decisions is to ensure that workers are no worse off financially during their period of four weeks paid annual leave under the Directive.

This line of decisions is not consistent with the Working Time Regulations (WTR).  Under the WTR many workers are only entitled to receive their basic weekly pay during periods of leave.  The case law now makes it clear that a worker’s pay for the four weeks of leave calculated under the Directive must be based on the workers “normal remuneration” which, from the cases is taken to mean the remuneration which he would normally receive were he not on holiday.  Non-guaranteed overtime and certain other allowances, for example travelling time payments, have been held to be “normal remuneration” and should be taken into account when calculating holiday pay for the four weeks derived under the Directive.  To make matters worse there are also a number of Tribunal decisions which have held that voluntary overtime constitutes “normal remuneration” and should usually be taken into account for holiday pay purposes.  In terms of British Gas v Lock, results–based commission must now also be taken into account when calculating holiday pay but only for the four weeks holiday pay derived from the Directive and not the additional 1.6 weeks leave provided for in terms of WTR or indeed for any further periods of leave.

Workers are entitled to claim unpaid holiday pay as unlawful deduction from wages but have to do so within three months of the alleged underpayment.  In addition, there is now a statutory limit of two years on payments for unlawful deduction of wages, including underpayment of holiday pay.

It will doubtless be a disappointment to both practitioners and employers that the Judge in the Lock case made no attempt to establish the appropriate reference period for calculation of holiday pay.  Accordingly, this much anticipated decision really takes us no further forward.  It should also be noted that British Gas has sought leave to appeal to the Supreme Court and we will of course report as soon as there are any further developments.

Employers should of course be making financial provision for claims where they are not taking account of overtime, commission and the like when calculating holiday pay.  Alternatively, where overtime and so called commission payments are regular and can be calculated with some degree of certainty, employers have the option of factoring these payments into the calculation of holiday pay.

WJM’s Employment Team notes that, while it is now clear that commission should be included in holiday pay calculations, we are still some way to having clarity as to how this is to be achieved.  Please contact the WJM Employment Team should you need any case specific advice.

If you have any questions about the above or would like to meet with our Employment team please contact Martin Stephen at ms@wjm.co.uk