I have noticed recently that I am receiving a lot of queries about holiday pay, demonstrating that there is a lack of understanding of legislation with respect to holiday pay calculations. Hopefully, I can give some clarity on the matter.
Under the Working Time Regulations, the UK adopted 5.6 week’s annual leave as the statutory minimum amount of leave a UK worker should be entitled to. The statutory minimum under the EU Working Time Directive, however, is only 4 weeks. Irrespective of legislation, basic rate was used for the purposes of holiday pay calculation.
In addition to basic salary, some employees receive other payments as part of normal remuneration e.g. night shift allowance, overtime payments, bonuses etc. There were a number of test cases in the last couple of years brought on the grounds that employees should not suffer a detriment in salary as a result of taking holidays. Such test cases have resulted in a change in legislation with respect to how holiday pay is calculated.
In Lock v British Gas Trading Ltd, the European Court of Justice concluded that holiday pay cannot be calculated based on basic salary alone, where a worker’s remuneration included commission.
The above ruling led to others challenging their employer’s calculation of holiday pay. In Bear Scotland Ltd v Fulton, the Employment Appeal Tribunal concluded that non-guaranteed overtime should also be included as “pay that is normally received.”
Holiday pay should now be calculated by reference to the average of the previous 12 week’s pay for employees who do not have normal working hours or where pay varies from week to week as a result of payment of bonuses or other allowances. It is important to note that the ruling only applies to the EU Directive of 4 weeks leave but does not apply to the remaining 1.6 weeks of UK entitlement.