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The trials and tribulations of calculating holiday pay

How can something that should, theoretically, be so straightforward be as complicated as the calculation of holiday pay? The EU-induced state of flux continues as litigation moves on to whether the calculation of holiday pay should encompass payments beyond basic salary such as overtime, allowance payments, bonus or commission and winds its way through the Courts.         

Under long-standing UK law the rules are apparently very simple. Employees with normal hours of work are paid holiday pay based on their normal hours, ignoring things such as voluntary overtime etc. Employees with no fixed hours of work are paid based on a 12 week average of their pay. 

However, this has all been thrown into confusion by a recent EU decision suggesting that all workers are entitled to holiday pay based on their “normal remuneration” and that that should include any variable payments that are intrinsically linked to the performance of tasks that the worker is contractually required to perform.  

So what does this mean? The strong trend originating from European holiday cases tends to favor employees, the possible outcome of which could be the inclusion of voluntary overtime, commission/bonuses or other allowances in the calculation of holiday pay. This inevitably would be of great expense to employers. There are already a series of first instance decisions along these lines which are subject to an appeal to be heard in the Employment Appeal Tribunal (EAT) on 30 and 31 July 2014.

More progressive employers may adopt a pro-active stance of revising the way in which holiday pay is calculated, in line with the employee friendly European approach and compensating employees in respect of past holiday pay. Some employers have elected to effectively break the chain of causation by revising the way in which they calculate holiday pay now in the hope that no claims relating to past holiday pay are brought. The most common approach however is one of waiting and seeing what the EAT hearing on overtime in July 2014 brings.  Those employers who adopt this approach would be sensible to also budget for an employee friendly outcome.

We will be in attendance at the EAT on 30 and 31 July 2014 and will be Tweeting live from the hearing. Keep up to date and Follow us @dwf_employment

Author: Sophie Bonner

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Philip Harman

Partner

I am an employment law specialist advising a wide variety of UK employers upon all aspects of employment law and practice, employment relations and business immigration.