The recent ruling on holiday pay was hotly anticipated by the legal community, sending a number of my colleagues into a furor of second guessing and forecasting, while pushing many employers into anxiety fuelled meltdown. It is (potentially) that serious and could open the flood gates for claims of backdated holidays pay where employees have not been paid the correct amount. Following this ruling, it has been decided that holiday pay should be based on an employee’s average weekly earnings (which would include holiday pay and overtime), rather than their basic weekly earnings.
I recommend reading Jack Troup’s overview of the case findings for those seeking the legal perspective: http://www.avensure.com/professional-insights/legal-brief-holiday-pay. My intention here is to provide a more accessible account relating specifically to anyone outside the legal profession.
Before this ruling, non-guaranteed overtime (overtime which does not have to be offered but the worker is obliged to work) and voluntary overtime were not typically included when calculating a worker’s rate of holiday pay. The employee was only entitled to be paid their basic rate of pay based on their contracted hours of work.
However, the recent ruling has clarified the following points:
- Workers should have non-guaranteed overtime taken into account when they are being paid annual leave. It may also be that regular voluntary overtime should also be included if it is part of a worker’s normal remuneration. Consequently, when an employee takes annual leave, their holiday pay should be based on an average of their earnings over the previous 12 weeks.
- Anybody making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an employment tribunal claim. If a claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between such underpayments.
It should be noted that this judgment only applies to 4 weeks of a worker’s annual leave, which is the basic amount of leave required under the EU Working Time Directive.
For employers currently going into a catatonic state of shock, I recommend taking a deep breath of composure because the Employment Appeal Tribunal has given permission for this judgment to be appealed to the Court Of Appeal; all is not lost. However this could take some time and, in the meantime, this recent ruling is current law and binding on employers.
We can say with some confidence that the following elements of an employee’s pay packet should be included when calculating their 20 days holiday:
- 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 payments
- Seniority payments (payments linked to qualifications / grade / experience)
- Stand-by payments
The decision will be of some relief to those businesses living under a cloud of apprehension that backdated pay could go back years. For now, they must consider the costs of settling recent liabilities and paying the correct holiday pay moving forwards.