Holiday Pay Update

You may have heard the news that the Employment Appeal Tribunal recently decided that overtime payments should be included in the calculation of workers’ holiday pay.

What are the key points?
When an employee (or worker) takes holiday they must receive pay that is equal to their ‘normal pay’.

If your employees receive guaranteed, or non-guaranteed overtime payments you need to factor these in when making payment for annual leave.

To complicate matters, only the 4 weeks holiday per annum under the European Working Time Directive needs to be increased in this way. The remaining 1.6 weeks extra holiday under the UK’s Working Time Regs does not carry this entitlement and neither will any contractual entitlements to more than 5.6 weeks.

So unless you are willing to be more generous than is required, two different calculations will need to be used, with a higher rate for the first 4 weeks leave than for the remainder!

When can employees claim from?
In theory claims could go back many years. However, the Tribunal decided that if more than 3 months has elapsed between payments then claims will be out of time. So, for the majority of employees claims can only go back 3 months. However, this part of the judgment may be appealed.

What should you do?
For the time being the reference period for calculating ‘normal pay’ is 12 weeks. Provided there is nothing manifestly unfair in adopting this period, we suggest that average overtime worked and paid in the 12 week period prior to the first day of annual leave should be included in the daily rate for the first 4 weeks of annual leave taken in each holiday year.

What other payments should be included?
Other payments that need to be factored in when paying workers for the 1st four weeks of annual leave include:

  • Commission
  • Incentive bonuses
  • Travel time payments
  • Seniority payments
  • Stand-by payments

Commission Payments and Holiday Pay

On 29th May we reported the European Court’s decision that holiday pay must include rolled up commission payments

At the Employment Tribunals National User Group meeting on 1st October it was reported that no less than 300 group claims concerning holiday pay are now going through ACAS early conciliation.

Employers who have not yet come to terms with this sea change need to pay attention and correct their practices. The sooner they do this: the better their chances will be of limiting the amount of backpay that can be claimed.

The European Court of Justice says: ‘holiday pay must include commission’

If your employees receive commission payments in addition to their normal basic pay this decision will affect you.

The ECJ has decided that the Working Time Directive (enacted as the Working Time Regulations 1998 in the UK: specifically Reg 16) requires member states to ensure that workers who take leave are paid by reference to not only normal pay but also commission payments.

In other words: normal pay needs to be augmented to reflect average commission earnings over the period of annual leave taken.

Whilst any amendment to the Working Time Regulations may be some way off: in the mean time the courts and tribunals will interpret existing provisions with this ruling in mind.