Holiday Pay – The mystery unravelled

The tribunals have been full recently of holiday pay cases, starting with Williams Vs British Airways and ending with Fulton Vs Bear Scotland, with the Lock judgement expected in February. Between them the cases have determined that certain overtime pay, bonuses and commission should be included in holiday pay and led to John Lewis settling back pay for £40m. As most employers tend to pay holiday pay at the ‘normal basic rate’ the ramifications of these cases are enormous.

So what is this really all about? The whole issue stems back to the use of 2 words in the Working Time Regulations. These require that workers are entitled to holiday paid at their ‘normal pay’. All of the cases that have been in the press lately concern what ‘normal pay’ actually is. Mr William’s a British Airways pilot, won his argument that his flying pay allowance constituted ‘normal pay’ and so should have been paid while he was on holiday. On the back of that case another employee showed that his commission earnings constituted ‘normal pay’ (forming as they did about 60% of his gross pay) and won his case. John Lewis realised that it should have been including weekend premium payments and decided to settle ahead of potential claims. In a more recent case the employment judge concluded that in situations where the employer could require paid overtime from an employee (but doesn’t guarantee it) then this should also be regarded as ‘normal pay’ and although this case may yet be appealed, the omens are not good.

The thinking behind the Working Time Regulations is that employees should not be disadvantaged in terms of pay when they are on holiday. Why? Because, say the European courts, an employee needs rest time for health and safety purposes, and if they are effectively paid less when on holiday some workers will be less likely to take holiday and so the health and safety intentions of the legislation are not being met, or put another way, the workers health and safety may be compromised. It’s for this same reason that rolled up holiday pay (where workers are routinely paid holiday pay while they work but then actual holiday is unpaid) was banned.

There are two further quirks to holiday pay which are worth mentioning here. The first concerns potential damages, which (because the cases are all linked to working time regulations) could go back as far as 1998, when the regulations were introduced. The second concerns the amount of holiday in any given year that is affected be these cases. As drafted the European regulations require employers to provide 4 weeks paid holiday per annum which can include bank holidays. In the UK our government has decided to increase this to 5.6 weeks. The ‘normal pay’ issue only offends the European minimum requirement of 4 weeks, and so UK employers could if they choose pay ‘normal pay’ for 4 weeks worth of holiday to include all of those additional aspects required by recent case law, and pay the remaining 1.6 weeks at ‘basic’ if they so choose. Damages for past underpayment would be similarly assessed.

Whilst immediate action following the recent ruling on ‘non-guaranteed’ overtime is not yet required (pending an appeal and the advice of a government task force set up to understand the implications of the ruling) employers who may be in breach may choose to put the breach right now by amending employment contracts to remove the requirement to work overtime and replace it with a more voluntary flavour. Once three months have elapsed from the date of the last breach, workers will be out of time to bring a claim in an employment tribunal and the risk of claims stretching back to 1998 disappears. A contractual amendment letter for this purpose is available from myHRdept on request, and a copy should be kept on affected employees personnel files.

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