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Employers may have to pay employees more holiday pay and employees may have holiday pay claims against their employers dating back to 1998 following a decision of the Employment Appeal Tribunal (“EAT”) on 6th November 2014.

In essence, the EAT has ruled that an employee is entitled to their ‘normal’ pay when on holiday. For fixed salaried employees there is no change. However, employees whose pay fluctuates (due to working overtime, where commission payments are made or where work related travel time is paid) will be entitled to have their holiday pay computed by reference to their average pay calculated over a prior reference period.

At present many employers only pay employees for their minimum contracted hours when they take holiday leave.  Employers may therefore be liable for the difference between the minimum contracted hours and the employee’s average pay on previous holiday pay. The difference can be significant when overtime, bonuses and / or commission make up a substantial part of an employee’s remuneration.

The EAT ruling will, however, only apply to certain types of overtime and travel time payments.  The detailed position is as follows.

Guaranteed overtime is where the employee is obliged by the contract to offer and pay for agreed overtime.  Following a judgement in 2004, guaranteed overtime must be included within the calculation of holiday pay.

Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but, if they do, the worker is obliged by the contract to work this overtime. The recent ruling on 4 November 2014 has clarified that workers should have their normal non-guaranteed overtime taken into account when they are being paid holiday pay.

Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request as there is no contractual obligation on either side to offer or refuse overtime. The question of voluntary overtime has not been directly considered by any recent judgements, so there is currently no definitive case law to suggest that this needs to be taken into account when calculating holiday pay.

Work related travel can have a number of different meanings but for most employment matters this will usually mean any travel that is made for work purposes that is not a part of a workers commute to their usual place of work.  Where payments are made for time spent travelling to and from work as part of a worker’s normal pay, these may need to be considered when calculating holiday pay.

While there is no reason in principle why employee holiday pay claims cannot be backdated to the date when the Working Time Regulations, on which this case was based, came into force in 1998, in practice the EAT went on to limit the potential for claims for historical non-payment of holiday pay. Broadly, where at any time there has been a three months or longer gap between an employee’s holidays the employee is precluded from making a claim in respect of any holiday periods occurring before the latest such three month interval.

The EAT has given permission for this judgement to be appealed to the Court of Appeal.  At the time of writing, an appeal has not yet been lodged, but it is expected that it will be.  This means that a final decision on this issue is likely to be some time away.  In the meantime potentially affected employers may want to urgently review their employees’ contracts of employment in order to mitigate the effects of the EAT ruling going forward. Employers should also seek advice on how to minimise their exposure to historic holiday pay liabilities. If you would like further guidance on how to proceed please speak to your normal Thomas Westcott contact.

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