The 2014 Holiday Pay Ruling

On 4 November 2014, the Employment Appeal Tribunal handed down its decision and gave employers some further clarity in relation to the way employers should calculate their employee holiday pay in the future. 

The key points to take from the decision were that:

  • Holiday pay from now on, must be paid at a rate equivalent to a worker’s “normal” pay. What is considered to be “normal” not only depends on an employees standard hours, but any periods of overtime substantial enough to be considered as “normal”.
  • Overtime which a worker is not permitted to refuse (i.e. guaranteed and non-guaranteed overtime) must count as part of their “normal” pay when calculating the pay they should receive when they are on holiday.
  • Following this decision, any historic underpayments of holiday pay for the vast majority of workers will only be considered for the three months prior to this decision – in essence August, September and October 2014. The limiting of this is a huge relief to employers who feared that they might be liable for years of back-dated holiday pay.

The finer details which employers and employees need to appreciate:

  • The decision only applies to the 20 days’ of annual leave under the Working Time Directive, not the additional 8 days’ or more employers may have chosen to give their employees. In summary, this is an EU ruling and therefore even though UK law has set a minimum holiday entitlement of 28 days for full time employees, as an EU decision it only equates to the EU requirement of 20 days annual leave. Whilst this is good in so far as it limits further increases in costs, it might pose some further complications with regards to the mechanics of running a payroll system. Employees should expect to receive a higher rate of holiday pay, which includes a payment for overtime, commissions or similar for 20 days holiday per year. The remaining leave should be paid at the previous level, unless you decide for the sake of ease to pay all 28 days at the higher level, using one method of calculating leave pay across the board.
  • The decision, and subsequent discussions on this subject have failed to come up with a definitive statement to confirm that purely voluntary overtime, which the employer is not obliged to offer and the worker is not obliged to accept would also be included, when making the calculation for pay. However, most people are leaning towards the view that voluntary overtime, which is considered to be regularly worked by a worker would count as part of their “normal” pay and therefore should be included when calculating holiday pay, from this point forward.
  • Employers are being advised to use the standard 12 week reference period for calculating average pay. However some workers’ pay varies considerably throughout the year dependent on the business sector they are in, and therefore for some, the 12 week reference could be inaccurate depending on the time of year for that sector. 

For example, a retail worker whose holiday year ends on the 31st March, and who does far more overtime during certain periods (i.e. Christmas), would have a far higher average number of hours as their “normal pay” if they took their leave in January, February or March, as they tend to prior to the end of the holiday year, when applying the 12 week calculation. Similarly, a salesperson who takes leave shortly after an unusually large commission payment could receive inflated holiday pay which is not representative of “normal pay”.

In such cases, a longer period may be necessary and be justifiable, but we will have to wait and see how this issue is addressed over the coming months.As a result of this decision, employers are now advised that the following considerations need to be taken into account when calculating holiday pay, or as a minimum at least when calculating a workers initial 20 days’ holiday.

Payments should now include the following element from the previous 12 weeks’ pay:

  • 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 premiums
  • Seniority payments (payments linked to qualifications / grade / experience)
  • “Standby” or “on-call” payments

This decision will inevitably increase a company’s payroll, where a company requires regular overtime or makes additional payments such as bonuses, by approximately 3-5% in some cases. With Christmas coming up, employers are advised to start to think about this now, and to implement any changes prior to the Christmas period. This decision and its implications were widely covered by the media and as such employees will be expecting their employers to action the change. Where employers delay, they may expect to receive complaints from their workforce, many of whom will be fully aware of the implications of this decision and be expecting to see it reflected in their holiday pay this Christmas. 

The good news for employers, however, seems to be the restrictions on workers being able to claim back pay, beyond the last three months. The position on this may change if the decision is appealed, however for the time being employers are urged to incorporate the changes as soon as is technically possible.