Calculating Holiday Pay

Calculating Holiday Pay

17th February 2016

Additional Liabilities for Employers.

Over the past 24 hours the media has been in frenzy over the issue of the calculation of Holiday Pay following the judgement handed down by the Employment Appeals Tribunal yesterday, 4 November 2014.

The Judgement concerns a test case arising from on a series of appeals that have all been heard together in Bear Scotland & Others -v- Fulton (and others).


The Decision

The Tribunal has been asked whether the calculation of Holiday Pay should include overtime and travel payments (other than expenses) as part of “normal work”?

Mr Justice Langstaff has ruled that a weeks pay for the purpose of any annual leave under the working time directive should relate to an average including overtime as well as any travel time payments (but not expenses) which occur in an employee’s employment.

It does not matter that the Overtime may not be guaranteed, or that the Employees may not be compelled to do it.


Practical Effect

What does this mean?

In practice it will not affect salaried employees who do not benefit from additional overtime payments as they receive a flat rate in any event.

Those that will be affected are employees who are provided with additional pay for overtime they complete. Those employees will now be entitled to have overtime payments (including any pay enhancements) used as part of the calculation of wages which they should receive during their periods of holiday. Under the Employment Rights Act 1996 (‘the Act’) a weeks’ pay is calculated by reference to section 221 and which provides that it should be based upon an average of the 12 prior weeks.

Under the Working Time Regulations 1998 (‘the Regulations’) this means that any person who has taken holiday and been paid without any overtime being accounted for in the last 3 months may have the basis of a claim available to them for unlawful deductions from wages.

A question has been asked as to how far this can go back. Certain elements of the media have stated that it could go back to the date upon which the Regulations and the Act came into force, i.e. as far back as 1996 or 1998. However this is grossly exaggerated and highly unlikely to occur as:

  • a) Limitation in contractual claims is only 6 years. Therefore to get claims beyond that period is unlikely.
  • b) Any claim which is presented before the Employment Tribunal must show that it is a continuous chain of events and therefore the last underpayment must be within the last 3 months and any prior underpayment must always be within 3 months of the last underpayment: if that does not occur then the chain is broken. It is highly unlikely that such a chain would be able to stem back in excess of several years without being broken.


A further problem arises in presenting such claims on the basis that the Tribunal has concluded that the inclusion of overtime in calculating Holiday Pay only applies to the holiday laid down by the European Legislation and found in Regulation 13. The European law only provides for 20 days per annum annual leave. It then follows that this ruling does not apply to Regulation 13A where the domestic legislation for the UK grants additional holidays. In the UK employees are entitled to 28 days holiday per annum; therefore the remaining 8 days can be paid at the flat basic rate. The Judgement rather unhelpfully did not indicate how this should be spilt retrospectively. Nevertheless it remains clear that this will impact upon the limitation periods and how they are run.


The Future

What is clear is that if upheld on appeal this case has the potential to cost industry a significant amount of money in damages to underpaid employees. It is easy to see how this has the potential to create significant problems for industry and the economy as a whole.

The government has already intervened in these proceedings and was represented at the hearing; clearly this is a significantly important case. The advantage is that normal commercial practices are unlikely to apply and even if the other cases settle the government may in fact pursue a series of appeals in which to obtain a satisfactory outcome for industry in this matter. It is notable that the Vince Cable has already indicated his, and the government’s, opposition to the judgement and that it intends to fight on.

It also should not be forgotten that Mr Justice Longstaff in his decision has already granted leave to appeal the decision. It follows that an appeal is almost certain, and this judgement will not be the end of the matter.

As such a knee jerk reaction to the judgement should be avoided at this time.


Practical Steps

Clearly any cases on this are unlikely to be moved forwards any time soon. It is foreseeable that whilst claims may be issued they will be then stayed pending the outcome of the appeals in this case. It is possible that upon appeal the decisions may be overturned and the status quo preserved.

In the event that there are concerns regarding this decision in order to limit liability going forwards employers may consider:

  • Taking on Salaried staff without payment for additional overtime (although care must always be taken to ensure that they do not fall foul of the Minimum Wage) , or
  • Cutting overtime but instead:
  • Taking on additional employees, or:
  • balancing fluctuating workloads with the use of agency or temporary staff, or shift working
  • varying contracts of employment to include rolled up holiday pay as part of the overtime rate payable.
  • seeking to ensure that any holiday left in this year is stated to be the additional holiday under Regulation 13A and thereafter seeking to try to provide at least a 3 month break between holiday provided under Regulation 13 with a view to breaking the chain of events and thus minimising claims within the limitation period.


This article is not a substitute for legal advice and in the event that you are concerned about the implications of the case discussed above, we would invite you to contact us to discuss its impact upon you and your business.