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27 November 2014

Holiday pay should include overtime and commission payments

In a recent landmark judgment, the Employment Appeal Tribunal (EAT) has held that employers must ensure that statutory holiday pay takes account of pay for non-guaranteed overtime and commission payments received by an employee.

Background

The EAT decision concerns the issue of whether or not non-guaranteed overtime (i.e. overtime which a worker is required to work but which an employer is not required to offer) should be taken into account when calculating holiday pay.  The argument put forward on behalf of the employers was that the Working Time Regulations require employers to pay only normal basic pay during periods of holiday.

The employees (in a number of separate claims) had been successful in their claims that the failure to include non-guaranteed overtime into the calculations to establish average pay for holiday pay purposes amounted to unlawful deductions from wages.

Decision

The EAT held that non-guaranteed overtime should be taken into account when calculating holiday pay. It noted that such payments are intrinsically linked to the employees’ duties and should therefore form part of normal remuneration for the purposes of calculating weekly holiday pay.   The concern is that, if employees are paid holiday pay at a lower level than they would ordinarily achieve when at work, this puts them at a disadvantage and may act as a disincentive to taking holiday.

The result of this (and other) judgments is that any payment intrinsically linked to an employee’s duties will need to be considered and potentially included when determining the correct rate of holiday pay.  This is likely to include, in addition to guaranteed and non-guaranteed overtime: commission; incentive bonuses; travel time payments (not expenses, but payments spent for time travelling); shift premia; seniority payments (payments linked to qualifications/grade/experience); stand-by payments; and certain other payments such as “time away pay”.

Additionally, the EAT also considered employers’ liability for historic underpayments. The EAT held that a period of 3 months or more between instances of underpaid holiday will break the series of deductions. This potentially curtails workers’ ability to claim large historically underpaid holiday pay going back over a substantial period of time.

Comment

The inclusion of overtime and commission pay in the calculation of holiday pay will ultimately mean many employers face an increased wage bill. It may be some small consolation that the decision in this case only concerns the 4 weeks statutory leave mandated by the Working Time Regulations. The 1.6 weeks additional statutory leave also required by those regulations and any further contractual holiday entitlement can continue to be paid at the lower rate of basic pay.

It is tempting to think there is now at least clear guidance on the principles for calculating holiday pay, ending the significant uncertainty in the lead-up to this judgment. Unfortunately, the judgment provides no practical guidance on the mechanism by which overtime pay and commission should be included. Depending on the circumstances this might require a calculation of average pay of the kind applied to workers with irregular hours, but it is not clear over what period the average should be taken.

It is encouraging that the EAT’s decision to impose a limit of 3 months between instances of underpaid holiday will effectively limit historic liability. At first instance, the tribunal had found that it did not matter whether the underpayments occurred at irregular intervals.

There had been significant concern that some employers could face claims dating back to the inception of the Working Time Regulations in October 1998. This now seems unlikely, as period of additional leave are likely to break the chain of deductions from year to year. The EAT has, however, granted leave for appeal on this point, so the full extent of historic liability is not yet certain.

It is therefore unfortunate that even after this decision many employers face continued uncertainty, other than the fact of a significant increase in costs. The government has been quick to announce a taskforce to investigate possible ways of limiting the impact of this decision; no doubt employers will await their report with significant apprehension.

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