At the end of 2014 and in March 2015 we reported on key judgments on holiday pay that have had a significant impact on how to calculate holiday pay and what to include. As a result of this, we’ve moved away from the traditional approach of basing holiday pay on basic pay only to having to add in overtime, commission and bonus payments.

Since our report there has been no significant change in the position and no clarity from the courts on what employers should be doing. For the time being, we know that holiday pay must be based on pay that is normally received and must include:

Payments linked intrinsically to the performance of the tasks which the worker is required to carry out under their contract of employment; and
Payments which relate to the worker's professional and personal status.

These payments will include the following examples:

Overtime pay – whether guaranteed or non-guaranteed, compulsory or voluntary overtime it is likely that it should be included in holiday pay. The only potential exclusion to this is where overtime is strictly voluntary and worked on a rare and exceptional basis.
Allowances – for example shift allowances, night work, travel supplements, away from home allowances, etc.
Commission that would have been earned had the employee not taken holiday!

When calculating pay that is normally received, it will be necessary to take an average of a worker’s pay over a set reference period. We still have no guidance as to what this reference period should be and employers are currently setting their own.

The Employment Rights Act provides for a reference period of 12 weeks and is used for calculating a worker’s average weekly pay in other scenarios e.g. the calculation of redundancy pay. This could be applied to holiday pay by taking an average of pay in the 12 weeks before the holiday is taken.

National Minimum Wage legislation provides for a reference period of 1 month, which again could be applied to holiday pay by taking an average of pay in 1 month before the holiday is taken.

Some employers are using reference periods of 12 months to even out peaks and troughs of activity. This is to help combat the situation where a worker taking holiday immediately after a busy period ends up being paid more than if he came in to work.

As always, my direct dial is 01484 821309 or my email address is katebooth@eatonsmith.co.uk

The information contained in this article is for information only, is not exhaustive and does not constitute legal advice. You should take specific legal advice before acting on any of the issues raised in this article.