Calculating Holiday Pay

February 20, 2015

Recent case law, Lock v British Gas Trading (2014) and Bear Scotland Ltd v Fulton (and others)  and Hertel (UK)Ltd v Woods (and others) (2014)held that enhanced payments such as Commission (Lock v British Gas Trading  and non-guaranteed overtime payments (Bear Scotland and Hertel) should be taken into account when calculating holiday pay for employees.

The argument put forward by the complainant in the case of Lock v British Gas Trading was that employees would be deterred from taken their holiday if they were likely to suffer detriment (receiving less pay) when doing so.  This, it was argued, was against the spirit and intention of the European Working Time Directive.  The judge was persuaded by this argument and determined that for employees not to take into account these payments amounted to an illegal deduction from wages.  This argument then similarly applied to the cases of Bear Scotland and Hertel.

The case of Lock v British Gas Trading Ltd was referred to ECJ who have returned it to the Employment Tribunal for further guidance on the calculation of holiday pay.

It should be noted that these rulings relate only to the European Working Time Directive statutory 20 days holiday per annum and do not apply to the additional statutory 1.6 weeks (8 days) that applies in the the UK.  Similarly, if employers give enhanced holiday entitlement to their employees, this is not covered by this ruling.

Our legal advice is now that employers should therefore take into account any overtime, commission or other payments received by the employee in the previous twelve weeks when calculating holiday pay.  This is likely to include bonus payments if they are paid on a monthly basis but annual bonuses are unlikely to be affected by this ruling.  An average of the previous 12 weeks pay should then be determined before any period of holiday is taken and this should be the rate of pay used to determine holiday pay.

Representations are currently being made to the EAT with regard to the backdating of payments and a ruling has yet to be issued.  Our legal advice is that employers should, with immediate effect, adopt the averaging approach for employees who receive enhanced payments as described above.

We offer fully customisable templates of HR policies for sale. Should you wish to obtain a copy of our revised Holiday Policy please contact lia@hitchinhr.co.uk.