How to Calculate Holiday Pay

The Working Time Directive, which governs the amount of holiday employees have to be given, states that businesses should be calculating holiday pay using ‘normal remuneration’ but the directive did not define the meaning of ‘normal remuneration’. The decision by the EAT clarified the definition of ‘normal remuneration’.

The EAT held that normal remuneration for the calculation of holiday pay would not only be basic pay (which in the UK has historically been the basis of the calculation of holiday pay) but would also include regular, non-guaranteed overtime and commission, where applicable. Taxable remuneration for time spent travelling to work should also be included in holiday pay calculations.

It is important to note that this calculation of holiday payment is only in relation to the basic leave of four weeks granted by the Working Time Directive. Therefore, if your business offers employees more than the statutory minimum amount of holiday then pay for these days can be calculated using basic pay only.

There had been a great deal of concern that there would be no limit as to how far back claims could go; it appears, however, that this fear will be addressed. The ruling from the EAT has limited the potential for claims of historical non-payment of holiday pay. It would appear that if there is a gap of more than three months in any claimed series of deductions, the employment tribunal will not be able to hear claims for the earlier deductions.

What this means in practice is that claims may be allowed retrospectively until such time as there is a 3-month gap between holiday periods. Employees will then be able to link previous periods of holiday to the claim as long as there had not been a break of longer than three months between those periods of holiday.

As an example, if the law changes in December and an employee had taken holiday in November, they would be able to lodge a claim. They could link any holiday that they had taken previously to the qualifying holiday period as long as there had not been a break of longer than three months. So, if at any point an individual had not taken holiday for a 3-month period that is the furthest point to which they will be able to back date their claim.

The EAT has given leave for a further appeal to the Court of Appeal, and Business Secretary Vince Cable said he has set up a task force to assess the implications for employers. At this stage, the tribunal’s word may not be the last on the subject, so we wouldn’t suggest that you start to enter into any discussions with your employees on this issue. However, you may wish to start speaking to your accountant to analyse what your potential liability may be.

At this point in time, all you can really do is to wait and see what happens next.