Take care with the calculation of holiday pay

In recent years, there have been a number of cases before the Employment Appeal Tribunal (EAT) and the Court of Justice of the European Union (ECJ) which show that it can be difficult to calculate the amount of holiday pay due to an employee.

Under the Working Time Regulations 1998 (as amended) most workers are entitled to paid statutory annual leave. This is 5.6 weeks (28 days) if the employee works five days a week. These regulations are derived from the EU Working Time Directive (which requires workers to be given four weeks annual leave).

The fundamental principle decided by the ECJ and the EAT is that workers should be entitled to their 'normal remuneration' when on holiday.

Two important areas in which recent judgements have been made are overtime and commission payments.

In November 2014, three cases were heard together by the EAT. In these cases, employees were required to work overtime if requested by their employers. The EAT referred to this type of overtime as 'non-guaranteed overtime'.

Before these cases it was generally considered that holiday pay need only include 'guaranteed' overtime.

Guaranteed overtime is overtime which the employer guarantees to provide to the employee even if the employer has no work available at the time.

Following the principles set out by the ECJ, the EAT has decided that non-guaranteed overtime which is regularly paid must be taken into account in the calculation of holiday pay.

There is currently no definitive case law that suggests that voluntary overtime needs to be taken into account.

In February this year, a further ruling on commission and holiday pay was made by an Employment Tribunal in the case of Lock v British Gas although the principle had already been decided by the ECJ. Mr Lock was a salesman whose remuneration consisted of basic salary and commission calculated by reference to sales achieved (typically 60% of his remuneration). The ECJ held there was an 'intrinsic link' between the commission payments and the tasks he was required to carry out under his contract of employment. Therefore commission was part of 'normal remuneration'.

What should employers do?

It would be prudent to:

• review the variable elements in employees' pay and whether these are regularly paid. Overtime and commissions are two examples - there may be other amounts. The fundamental test is whether these sums are intrinsically linked to the tasks required to be performed by the employee
• consider including these elements in holiday pay going forward. The additional payments do not have to be for the annual leave given in excess of the EU four weeks requirement
• review employment contracts to see if they require amendment.

Acas has lots of advice on its website and for specific guidance, employers can contact a helpline provided by Acas: www.acas.org.uk/helpline

Please contact us for further details if this is an area of interest to you.