The Employment Appeal Tribunal has given judgment on the important question of what should be taken into consideration when calculating holiday pay (Bear, Hertel, Amec v Foutlon, Woods and others). What does it mean in practice? Let’s take it step by step.

(i) The questions to be determined

The case asked what should be factored into calculating holiday pay. Previously, holiday pay was calculated by reference to normal basic pay. The workers challenged this and said that overtime and other payments they received should be used when calculating holiday pay.

(ii) What did the Tribunal look at?

The Tribunal considered whether holiday pay should include non-guaranteed overtime, radius allowances, travelling time payments, fixed productivity allowances and performance based payments. ‘Non-guaranteed’ overtime means overtime the employer was not obliged to provide, but when it was the worker was contractually obliged to do it.

(iii) What the Tribunal didn’t consider

The case did not consider ‘voluntary’ overtime that the worker was not obliged to take up, commission and bonuses, how regular  non-guaranteed overtime had to be to be taken into account, nor  the length of the reference period (ie. how far back the overtime is averaged over). We will look at some of these issues below.

(iv) The judgment

The Tribunal has said that if a payment was “normal” pay (ie. intrinsically linked to the performance of the tasks the worker carries out under their contract) it should be included when calculating holiday pay. This means that compulsory and non-guaranteed overtime has to be included, as do other allowances.

Holiday for these purposes refers only to the European directive, which is 4 weeks holiday (or 20 days for full time employees) which includes bank holidays (“EU holiday”) – it does not deal with the extra 1.6 weeks holiday as provided for by the UK (the UK minimum holiday is 5.6 weeks).

If overtime and other payments are regularly paid, then it should be easy to work out what needs to be factored into holiday pay. If, however, the payments vary over time (eg. overtime for some weeks and not for others), then the business should look at the average payments over the reference period.

(v) Can backdated holiday claims be made?

The fear was that claims could go back to when the worker started work for the business, ultimately as far back as 1998. The Tribunal has allayed that fear.

Claims can be back dated only when there was less than three months between each holiday. The nuance here is that the Tribunal is only considering claims by reference to the EU 4 weeks holiday, which are deemed to be taken first in any holiday year. It is quite easy to see that most people would have taken this holiday early in the year and thus would then lose the right to any other backdated holiday pay.

(vi) Are commission payments, bonuses and voluntary overtime to be taken into account when looking at holiday pay?

Commission and bonuses intrinsically linked to the workers tasks were considered in the case of Lock v British Gas, which decided that such commission payments and bonuses should be part of the 4 weeks holiday pay.

What has not been decided yet (but it should be in the next month) is how this is to be calculated.  Arguably the reference period for averaging such commission and bonus payments for holiday pay should be the past 12 weeks; it would of course be easier and more manageable if the Tribunal decided that averaging should be over 12 months.

The question of voluntary overtime and holiday pay is yet to be determined by the Courts.

(vii) Are there any steps that businesses need to take?

Business need to plan how to approach holiday pay.

The judgment deals with the first 4 weeks of holiday only, not the extra holiday offered. If overtime and commission is paid, then it is worth ensuring that only the first 4 weeks of holiday pay includes commission and bonus payments, with any additional holiday to be calculated at basic pay.

Also, if the case of Lock decides that the averaging of commission and bonuses is over 12 weeks rather than 12 months, why pay the same in a lump sum rather than instalments? One off payments allow workers to take holiday straight after these payments in order to bump up holiday pay.

Finally, the bottom line is cost. We now have a situation where “normal pay” for holiday purposes is taken from a bigger pot. For companies where the profit margins are tight, what is now provided in additional holiday pay may need to clawed back by correspondingly lower pay rises.

Article by David Israel, Partner and Head of Employment Team, Wedlake Bell LLP