There have been several rulings earlier this year so we thought it would be a useful time to just remind ourselves of the current position with regard to calculating holiday pay.

The following payments / elements must be taken into account so that staff who usually earn such payments are not disadvantaged by taking annual leave:

  • ‘commission’;
  • ‘Guaranteed’ and ‘non-guaranteed’ overtime (i.e. where the employer is no obligated to offer overtime but if they do then the worker is obliged by their contract of employment to work it);
  • ‘other allowances’ that are “intrinsically linked to the performance of the tasks”.

At the moment there is no definitive case law to confirm that ‘voluntary overtime’ (i.e. where overtime is offered and the employee is free to refuse to work it) should be included.

When calculating holiday pay there are a couple of other details that must be taken into consideration:

  • the reference period for calculating average pay is not determined.  Current thoughts are that the ’12 week period’ used elsewhere is the most likely way to determine this;
  • the rulings only apply to ‘Statutory Leave’ under the Working Time Directive i.e. the first 20 days of any holiday entitlement and not the additional 8 days holiday nor any additional contractual holiday given.

Staff may also put in backdated claims for additional payments.  The period for which they can claim is restricted as claims for arrears of holiday pay will be out of time if there has been a break of more than three months between underpayments, and any claim can only be backdated for a maximum of 2 years.

Employers should review their contractual obligations and working practices to ensure the impact of the ruling going forward is manageable:

  • review your wording on overtime and remove any “requirement” to work this if in practice this is always worked on a voluntary basis;
  • if you require staff to work regular overtime you could reduce your payments by building more flexibility into your contracts e.g. if the workload has peaks and troughs build in the right to insist on time off in lieu rather than paid overtime;
  • ensure your record keeping of working time and overtime is accurate;
  • consider whether you will want to retain a “two-tier” holiday pay arrangement i.e. having the first 20 days paid at a higher rate than the remaining days.  If you do, check whether your payroll system will be able to cope with calculating holiday pay in different ways.

If you would like to know more about this subject please contact one of our HR consultants at info@connectivebusiness.co.uk