Holiday Pay Calculation: Update article banner image

In the last 12 to 18 months there have been a whole host of cases dealing with the issue of holiday pay and what should be included when calculating sums due to employees. We have previously reported the outcomes of Bear Scotland v Fulton and Lock v British Gas. In the last couple of months there have however been some recent developments on the issues raised by these cases.

You may recall that we reported in November 2014 that the outcome of Bear Scotland v Fulton was such that domestic law could be interpreted so as to give effect to EU law when considering payments for non-guaranteed overtime as part of holiday pay. The effect of this was that holiday pay calculations should be based on an employee’s “normal remuneration” which may, in appropriate circumstances, include non-guaranteed overtime. In March this year the Employment Tribunal in Lock v British Gas reached the same conclusion in relation to commission payments. Unfortunately, neither decision gave any clear guidance on how the calculations should be carried out.

However, lest you were to think the situation is now settled, a recent development has added to the uncertainty in this area.  An appeal was lodged in May against the decision given previously in Lock v British Gas and we are still therefore unable to give a definitive answer on how commission should be taken into account. The appeal is expected to be heard towards the end of this year.

British Gas have asked the EAT to look at the question of whether British domestic law can be interpreted in such a way as to give effect to recent EU cases which say that holiday pay under the European Working Time Directive must take account of elements of normal pay such as commission. British Gas say that commission and non-guaranteed overtime are dealt with under different provisions of domestic law, such that the decision of the Employment Tribunal to follow Bear Scotland was perverse. That case was in relation to overtime whereas Lock was in relation to commission. The two should not, they say, be dealt with in the same way.  British Gas will also argue that the EAT in Bear Scotland was wrong to conclude that domestic legislation could be given a purposive interpretation to bring it into line with EU law.

In light of the ongoing uncertainty with the upcoming appeal of Lock employers faced with the possibility of claims relating to unpaid holiday pay, and those who are already facing claims, will be asking for them to be stayed pending the outcome of this appeal to be heard later in the year.  Given the decision of the Court of Justice of the European Union in relation to Lock that the UK needed to include commission in holiday pay in appropriate circumstances, it seems likely that the EAT will take a similar approach but we will need to wait for their decision in due course.

In the meantime, the issue of voluntary overtime has not been the subject to any reported litigation in the English and Welsh courts.  However, it has now been addressed to a certain degree. The case of Patterson v Castlereagh Borough Council was heard on 17 June 2015 at the Northern Ireland Court of Appeal (NICA).  At first instance the Industrial Tribunal in Belfast had held that voluntary overtime should not be included in holiday pay calculations. The tribunal had considered the outcome in Bear Scotland.  However this was quickly appealed and the NICA have now stated that there is no reason, in principle, why voluntary overtime should not be included in statutory holiday pay. The Court went on to say that it will however be a matter for each tribunal to determine whether or not overtime is “normally” carried out and whether overtime pay can be described as forming “normal remuneration”. This effectively hands the decision back to each individual tribunal to handle on a case by case basis. Rather unhelpfully the Court did not analyse in any detail the circumstances in which voluntary overtime should be included in holiday pay.  However, it seems possible to conclude that for voluntary overtime to be included, there should be an intrinsic link between the tasks a worker is required to carry out and the remuneration received.  Further, it will have to be shown that the payments have been made over a sufficient period of time for them to qualify as “normal”.

Decisions of the NICA are not binding on our courts, however, the decision gives an indication of the stance that might be taken and may prove to be persuasive authority.

More positive news for employers is that due to new legislation enacted as a consequence of the recent holiday pay cases, claims presented to an Employment Tribunal on or after 1 July are limited to two years of underpayments of holiday pay from the date of the claim.

Until such time as we are able to report on the Lock appeal, or are able to provide any further clarification on these matters, we suggest that the following practical steps may serve as a reminder to employers of action they can, or should, take in the meantime:

  • Review the variable payments that you make to staff, e.g. voluntary overtime, non-guaranteed overtime, commission, shift allowances, travel allowances and other premiums in pay.  If someone is doing a lot of regular overtime, do you need to look at your staffing levels?
  • Carry out an audit of the workforce demographic and look at holiday patterns – this will help identify how long potential liabilities might go back for (but remember that Bear Scotland has probably limited exposure where more than three months has elapsed between deductions).
  • Where required by the new case law change your calculation of holiday pay to include non-guaranteed overtime and commission.  Consider including other variable payments such as voluntary overtime to avoid liability with developing case law.
  • Starting to pay statutory holiday pay at the correct rates will have the advantage of extinguishing historical claims once a period of three months has elapsed.
  • Consider if you are likely to face any new claims and, if so, do you want to try and negotiate your level of liability with your staff and settle the issue now?
  • Remember that paid holiday is important to staff. If you receive a grievance, deal with it appropriately. A grievance over something that seems simple can quickly erode a previously good relationship with an employee.
  • Seek legal advice if you have any concerns.  We can advise on any potential exposure and how to avoid any future liability.

The Stephens Scown employment team works in partnership with organisations to improve their HR practices and advise on employment issues. To discuss this or any other HR issue call 01392 210700 or