The Employment Appeal Tribunal (EAT) was considering three cases with regards to the correct calculation of holiday pay, including the Scottish case of Bear Scotland Ltd & others. As a result of the ruling employers will now have to calculate ‘non-guaranteed overtime’ along with ‘guaranteed overtime’ and commission, and include them in payments for holiday in the future.
Employers should check their current arrangements
Employers, if they have not already done so, should conduct an audit of their holiday pay arrangements to identify:
- Who may have been and still is underpaid for holiday
- When the last underpayment took place
- What should be included as part of normal remuneration and what need not be included
- Whether contracts need to be amended to reflect (i) inclusion of additional payments in calculating holiday (ii) the appropriate reference period, and (iii) whether all 5.6 weeks will be calculated this way or only the EU four week minimum.
Calculating holiday pay
Holiday pay must reflect ‘normal’ remuneration and not be calculated on the basis of basic pay only. This will involve averaging both hours worked and remuneration paid over the applicable and appropriate reference period. The reference period is likely to be between 12 weeks and one year, depending on the circumstances.
However, it only affects the basic four weeks holiday under EU law – the extra eight days required by UK law may still be calculated on basic salary only. On a practical level it may be complex and costly to distinguish between the two.
Payment will include basic pay plus payments linked intrinsically to the performance of contractual tasks or related to personal or professional status such as:
- Non-guaranteed and obligatory overtime
- Commission
- Productivity, attendance or performance bonuses or acting up supplements
Non-guaranteed overtime is overtime which the employer is not obliged to offer, but which the employee must accept if offered. The status of truly voluntary overtime which the employee is not bound to accept is not specifically addressed.
Overtime premia must be included in the calculation – so both extra hours and extra payments for overtime worked must be included.
Payments for expenses and other ancillary costs do not need to be included unless they go beyond what is needed to cover the employee’s costs and start to resemble an attendance bonus for example.
Backdating underpayments
The judge also dealt with the issue of underpayments and the prospect of claims for underpayments dating back to 1998. Two helpful points were made:
- If the last underpayment was over three months ago, in principle the claim is out of time
- Because only the EU four weeks are affected, the additional eight days allowed under UK law can be paid at basic rate. Because this is ‘additional’ holiday, these days can be considered to fall last in a holiday year – so it is likely that holiday has been correctly calculated and paid for the final eight days taken in the holiday year. This means that in many cases there will have been a break of three months across holiday years.
Although the ruling could be referred to the Court of Appeal, the judge noted that the principle of normal pay for holiday and the method of calculation were likely to stand, with only the issue of identifying underpayments and whether back claims are time-barred having any realistic chance of being overturned on appeal.
Conclusion
Pay for holiday should immediately reflect both non-guaranteed and guaranteed overtime and commission, along with other payments intrinsically linked to the performance of contractual tasks or status.
Employers who are faced with claims for back pay should ensure that their records of payments made are up-to-date and are advised to seek advice at the earliest opportunity.
