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The Legal Director

Posted 09/01/2015


Following the initial attention the landmark judgment on holiday pay attracted in November, businesses have now had time to reflect on the impact the ruling will have for them and should now begin to investigate their exposure to potential back pay claims and how to limit future claims arising.

What elements of pay should be included in holiday pay?
Overtime payments in the period leading up to the holiday must be taken into account in the calculation of holiday pay. Currently only genuinely voluntary overtime will be excluded; non-guaranteed but nonetheless compulsory or contractual overtime is included. The courts have also determined that “travel time” (where the employer pays the employee for the time spent getting to a job) must be included in the calculation. Commission has already been found to be part of “normal remuneration” for holiday pay calculations. Other types of additional payment have not been considered but more cases are in the pipeline.

How should holiday pay be worked out?
A calculation will have to be made over a reference period prior to any holiday, likely to be 12 weeks, to work out the average weekly wage including overtime (unless it is genuinely voluntary) based on how much the employee received in pay. That will determine the amount to pay for the period of holiday in question.
The ruling also makes it clear that this method of calculation only applies to the first 20 days/ 4 weeks of annual leave (the right conferred by EU legislation) and not any other holiday.

Should holiday pay be worked out in this way from now?
Yes. Whilst an appeal against the ruling could be successful, at present the decision means holiday pay should be calculated in accordance with the judgment. Businesses should take stock of their pay records now to enable holiday calculations to be carried out correctly when an employee takes annual leave. With the Christmas holiday period approaching and the media attention on holiday pay and the prospect of claims, employees will be clued up on how their holiday pay should be calculated. Where the calculations are wrong, employers should at the best expect complaints or grievances or, at worst, an influx of claims.

What about back pay claims?
The effect of this judgement is retrospective. It means that many employers will now face claims for “holiday back pay” on the basis that the underpayments amount to a series of unauthorised deductions from pay. There may be no cut-off date beyond which a claim can reach back but the decision did confirm that if there is a gap of more than three months between underpayments of holiday pay, that gap will break any chain of underpayments.
Employers should undertake an assessment to determine their exposure to historic holiday back pay claims. Where an employee has not received any holiday pay for over three months, it is likely they will be time barred from claiming an earlier payment was incorrect. That gap is bigger anyway as employers may be looking at the 20th day off in one year and the first day off in the next.

Are there any pitfalls to watch out for?
It is important to note that the deductions relate to the date of the holiday pay and not the holiday, so employees with a four month gap between holidays could still establish a chain of deductions, because of the way their pay dates have fallen.
At present, businesses that require staff to take bank holidays as annual leave may be vulnerable to claims given the 25 August bank holiday occurred within the last three months. However, if by that date employees had taken more than 20 days of their annual entitlement, they would have to wait until the beginning of their new holiday year to benefit from the next 20 days of holiday pay enhanced to include overtime pay. The gap in time may be too wide to preserve a claim for back-dated holiday pay.

For further advice and information (including a fixed fee review of your holiday payment practices), please contact Matt Jenkin (Employment Partner) at; 01242 246458.

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