Holiday Pay – Club Med or a wet weekend at Butlins?

Paul Kelly, Partner in the Employment Law Team at Leeds-based law firm, Blacks Solicitors LLP.

Earlier this year the calculation of holiday pay was given a shake up by the European Court of Justice (ECJ) in the case of Lock v British Gas. The ECJ ruled that regular commission received each month by Mr Lock was “intrinsically linked” to his pay and should form part of his holiday pay.

It will have been hard for readers to have missed the press coverage of the EAT’s long anticipated judgment in the more recent case of Bear Scotland Limited v Fulton, which builds on the Lock decision. Pundits predicted a holiday pay bonanza for employees. What is the reality?

The theory behind both judgments is that employees should not be deterred from taking holiday by the prospect of receiving only basic pay whilst away from the workplace. In fact, the Bear Scotland judgment only takes Lock a few steps further – adding to the mix non-guaranteed overtime (where an employer is not contractually obliged to offer it, but a worker is contractually obliged to perform it, if requested) and travel time payments.

The Legal Framework for Holiday Pay

Under the UK’s Working Time Regulations 1998 (WTR), workers are entitled to a statutory minimum of 5.6 weeks’ (28 days’ ) paid holiday per annum. This is more generous than the 4 weeks provided by the European Working Time Directive (WTD) from which the WTR derive. The principles which underpin the cases of Lock and Bear Scotland apply only to the 4 weeks period required by the WTD, not the 1.6 weeks added by the WTR.

The WTR use the concept of ‘a week’s pay’ to calculate pay for each of the 4 weeks during which employees must be paid under the WTD. Depending on the category of worker, the calculation of holiday pay is as follows:

– For those with normal working hours and whose pay does not vary – holiday pay is the same as pay for their normal working hours;

– For those with normal working hours but whose pay varies with the amount of work done – holiday pay is calculated by multiplying the hourly rate of pay averaged over the last 12 weeks period by weekly normal working hours;

– For those with normal working hours but whose pay varies with the time when work is done – as above; and

– For those with abnormal working hours – holiday pay is an average of all sums in the previous 12 working weeks.

The effect of the Lock and Bear Scotland judgments is that, when calculating holiday, if employees receive regular commission, work regular non-guaranteed overtime, or receive regular travel time payments that are intrinsically linked to their normal pay, these payments should be included when calculating their holiday pay. Employers should ensure that they calculate holiday pay correctly and so avoid being accused of having made unlawful deductions from employees’ wages.

In the next instalment we will look at how to put measures in place to govern the future payment of holiday pay. In our third and final instalment we will explore the limited scope employees have to claim for back-dated holiday pay.