The holiday pay case – What it really means for employers

As most readers will have read, on the 4th of November 2014, the Employment Appeal Tribunal (EAT) handed down its decision in a case concerning payment for holiday pay.

This case is, arguably, ground-breaking and one which gives us some clarity on that thorny issue of holiday pay.

Main points to note from the decision:

• Holiday pay should be the equivalent of a worker’s “normal” pay.
• What’s “normal” will depend on whether the (overtime) payment has been made for a sufficient period of time to justify the label of being “normal” – in essence what that means is the regularity / pattern of payments will be relevant.
• Guaranteed overtime, which a worker is not permitted to refuse,must count as part of the “normal” pay when calculating the holiday pay.
• In respect of past ‘underpayments’ of holiday pay, the vast majority of workers will only be able to recover underpayments in the last three months although a small number being able to recover sums further back.

Other points your HR department should understand:

• The decision only applies in respect to the first 20 days’ annual leave (not the additional 8 days workers are legally entitled to).
• Workers can expect to receive a higher rate of holiday pay (that which includes overtime, commissions and various other payments) for only 20 out of their 28-days’ holiday per year.
• Where workers’ previous periods of holiday are separated by a gap of less than 3 months, they may be able to recover underpayments for a longer period than the 3-month limit set out above because the underpayments may form part of a “series”.
• It is unlikely that they will be able to go back in time to recover underpaid holiday for more than one holiday year.
• There is no definitive statement in the decision to confirm that purely voluntary overtime (where the employer is not obliged to offer and the worker is not obliged to accept) should also be included. However, its likely that voluntary overtime which is regularly worked by a worker would count as part of their “normal” pay should be included when calculating holiday pay.
• Usually a 12-week reference is considered to calculate usual weekly wage, however, there could be a change to this because some workers’ pay is highly variable throughout the year and a 12-week ‘snapshot’ might be misleading representative of “normal pay”. In such cases, a longer period may be necessary.

As a result of this we can now say that the following elements of a worker’s pay packet should count when calculating their 20 days’ holiday derived from the Directive:

• Commission payments
• Guaranteed and non-guaranteed overtime that is regularly worked
• Incentive bonuses
• Travel time payments (not expenses, but payments for the time spent travelling)
• Shift premia
• Seniority payments (payments linked to qualifications / grade / experience)
• Stand-by payments

Certain other payments (such as “flying pay” and “time away pay” provided such payments are not expenses).

Laura Milne is founder and Managing Director at Lime HR, official partner to the National Business Awards.