Are you calculating holiday pay in the right way?

24 October 2017

New case law is a reminder that holiday pay is not just based on a worker’s basic pay.

Previously, employers only needed to look at a worker’s basic pay when calculating their holiday pay. Commission or overtime payments were not taken into account. 

But in 2011, the European Court of Justice in Williams v British Airways, decided that holiday pay shouldn’t just be limited to basic pay. Instead, it must reflect what the ECJ called ‘normal remuneration’ – that is any payment linked to the performance of contractual duties.

The later cases of Lock v British Gas and Fulton v Bear Scotland confirmed that holiday pay must also reflect commission earned, compulsory overtime and non-guaranteed overtime.

Recently, the Dudley Metropolitan Borough Council v Willetts case added more considerations to the list, including voluntary overtime worked on a regular and consistent basis, out of hours standby payments and call-out payments. 

What must be included?

  • commission;
  • compulsory overtime (overtime the worker must contractually work);
  • non-guaranteed overtime (overtime that’s not guaranteed but must be worked when asked);
  • voluntary overtime (overtime the worker is under no obligation to accept) worked regularly;
  • shift allowances;
  • acting up supplements;
  • on-call allowances / payments;
  • out-of-hours standby payments; and
  • mileage allowances treated as taxable benefits.

What should you take a view on?

  • voluntary overtime that’s not worked regularly;
  • monthly and quarterly bonuses;
  • productivity, attendance, team, company and performance bonuses; and
  • tips and gratuities paid via the payroll.

What doesn’t need to be included?

  • expenses; and
  • allowances to cover subsistence, accommodation and travel costs whilst away working.

Does this relate to all holiday workers are entitled to?

No. It only relates to the first 20 days’ holiday in each annual leave year. It does not cover the extra eight days’ holiday the worker is entitled to under UK law. Nor does it cover any other holiday they’re entitled to under their employment contract. 

Does this affect the holiday pay you’ve previously paid?

Unfortunately, the decisions have retrospective effect meaning that workers can bring claims for historic underpaid holiday pay. However, these claims are limited to the past two years and there are arguments which can be used to further reduce this timeframe. 

What do you need to do now?

To start, you should audit your payroll to work out what payments you’re making on top of basic pay, and which of these need to be considered when calculating holiday pay. 

You should also calculate what the financial exposure to historic claims of underpaid holiday pay might be and make a provision for that. 

If you want to confront the issue, you could update staff about how holiday pay will be worked out going forward. You could also let them know if you’ll compensate them for previously underpaid holiday or how you’ll deal with any claims. 

If you recognise a trade union or have a workforce consultation group or employee forum, you could consider drawing them into these discussions. Getting them onside at an early stage may help you limit any historic exposure and get agreement to your proposals on calculating holiday pay in the future. 

What if we do nothing?

You’ll expose your organisation to an ongoing financial liability and employee relations issues.