The recent Employment Appeal Tribunal (“EAT”) case regarding holiday pay has caused quite a lot of comment in the press but what effect will it have for employers?

Article 7 of the Working Time Directive (which is given effect in English law through the Working Time Regulations 1998) means that employees must receive their “normal remuneration” during their annual holiday entitlement.  The European Court of Justice has decided that the concept “normal remuneration” means an employee is entitled to holiday pay based not only on basic salary but also on any remuneration which is “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, including the calculation of his total remuneration, is provided.”  In subsequent cases the ECJ has used that decision to say that holiday pay under the directive cannot be calculated based on basic salary alone but should also include commission.

The question for the EAT in the recent case was whether or not nonguaranteed overtime should be included in the calculation of holiday pay.  Nonguaranteed overtime is overtime which the employer is not required to offer but the employee is required to work when asked.  This is distinguished from guaranteed overtime (overtime the employer is obliged to provide and the employee is obliged to do) which is already included in the calculation for holiday pay.  It is also distinguished from purely voluntary overtime.

The EAT decided that nonguaranteed overtime (and travelling time allowances) are “normal remuneration” and, accordingly, the Working Time Regulations 1998 should be interpreted so that workers receive holiday pay calculated on the basis of nonguaranteed overtime they have worked (and travel allowances they receive).  It should be noted that the effect of the decision on historical underpayments is limited because the EAT ruled that underpaid holiday pay cannot be claimed as the last in a series of deductions from pay when more than three months has elapsed since those deductions.

As the retrospective effect of the decision is limited, the major concern for employers will be what to do going forward.  Employers should remember that commission, guaranteed overtime and nonguaranteed overtime should be included in the calculation of holiday pay.  How this should be calculated is not entirely clear.  It seems where the payments are so consistent and settled, so as to amount to “normal remuneration”, the normal weekly sum pad to the employee should be paid; however, where the payments are inconsistent and not settled, employers should consider the employees’ average pay.  This should probably be calculated over the 12-week reference period referred to in the Employment Rights Act 1996 but the case law id not entirely clear on this point.

Employers should also note that payments strictly only need to be included in the four weeks’ annual leave granted by European law and not the additional 1.6 weeks leave, which is allowed under UK law.

If you have any specific questions raised by the issues in the article, please contact Simon Blake: 01756 700200; sjb@walkerfoster.com.  Each case is different and the above is only intended as a general guide.