The issue of correctly calculating holiday pay has been vexing lawyers and HR for almost two decades. But the problem has received significant attention at appeal tribunals in the last few years. So what is the current position regarding calculating holiday pay?
There are two types of holiday pay – that relating to the four weeks’ leave granted under the Working Time Directive (WTD), and that relating to the additional 1.6 weeks’ leave granted under the Working Time Regulations (WTR). The majority of the case law relates to WTD leave only. One option is therefore for employers to abide by the rules in relation to WTD leave, but to pay basic salary only for the WTR leave.
The most recent case law confirms that holiday pay for WTD leave must equate to a worker’s ‘normal remuneration’. In practice this means that the following must be included in the calculation:
- Guaranteed overtime (where the employer is bound to pay the worker even if they are not required to work overtime) – this is automatically included in the calculation of a week’s pay under the Employment Rights Act 1996 and therefore should be included in calculating both WTD and WTR leave pay.
- Non-guaranteed overtime (where the employer is not bound to provide overtime but the worker must accept it if offered) – this must be included in the calculation of WTD leave pay.
- Voluntary overtime (where there is no obligation for the employer to offer overtime and no obligation for the worker to take it if offered) – this should be included in the calculation of WTD leave pay where it is ‘sufficiently regular’. There is no definition of what this means but case law suggests that overtime worked once in every four or five weeks would qualify.
- Results-based commission – this must be calculated by reference to a ‘representative’ reference period. It is unclear whether this means the 12-week period referred to in the ERA 1996 or a longer period; potentially even up to 12 months.
- Productivity- or performance-related bonuses – prospectively team bonuses as well as those relating to individual performance should be included.
- Standby payments and on-call allowances – again an average should be taken over a ‘representative’ reference period.
- Allowances – that compensate workers for performing certain tasks or performing tasks under certain conditions or at certain times (such as travel time payments). Reimbursement of genuine expenses incurred by the worker (such as lunch) do not need to be included.
Lucy Gordon is senior solicitor at ESP Law, provider of the HR Legal Service