Guide to average holiday pay

What you need to know

In 2014, two employment tribunals; Fulton v Bear Scotland and Lock v British Gas; resulted in two new rulings regarding calculation of holiday pay. They state that overtime and commission should be included in the holiday pay calculation. This section provides an overview of the rulings and explains how they affect holiday pay.

Background

An overview of the legislation affecting holiday pay is provided below:

Act Effect on holiday pay/payroll

Employment Rights Act

Employees should be provided with a written statement surrounding the terms and conditions of their employment. There is no guidance surrounding the calculation of holiday pay, other than it should be done consistently. Employees cannot have unlawful deductions of wages i.e. an employer taking money from an employee’s wage other than the statutory requirements (this only applies to certain pay elements).

European Working Time Directive

All employees throughout Europe are entitled to a minimum of 4 weeks paid annual leave.

UK Working Time Regulations

All employees throughout Europe are entitled to a minimum of 4 weeks paid annual leave In the UK employees are entitled to a minimum 5.6 weeks of paid leave, taking into account bank holidays, which account for the additional 1.6 weeks of paid leave.

All UK employees are entitled to a minimum 5.6 weeks annual leave:

Regulation 13 leave: 4 weeks or 20 days.

Additional Leave: 1.6 weeks or 8 days (with additional days in Scotland and Northern Ireland) .

Contractual Leave: Anything additional.

The four weeks associated with the European Working Time Directive is often referred to as statutory leave but is officially called Regulation 13 leave and cannot be carried over into another holiday year. Additional leave can be carried over

Regulation 13 leave can be carried over if the employee has not been given the opportunity to take the leave i.e. has been off sick.

Few employers record the different types of leave. ‘The Bear Scotland judgement also considered this situation and concluded that… "it would be reasonable for an employer to assume that ‘Regulation 13 Leave’ was used up first, followed by ‘additional leave’ and then any remaining ‘Contractual Leave’".

Employees should be encouraged to take these four weeks as a minimum. The taking of statutory leave is the basis for the appeal raised by Lock in Lock v British Gas.

Fulton v Bear Scotland

Fulton argued that not including compulsory overtime in the calculation of holiday pay was an unlawful deduction of wages, as overtime was part of the normal remuneration package. In November 2014, the European Appeal Tribunal (EAT) ruled in favour of Fulton and stipulated that holiday pay should include compulsory overtime in the calculation. The ruling does not affect voluntary overtime.

What is compulsory overtime?

Compulsory means the employee has no choice but to work the overtime. This includes:

Guaranteed overtime: Where the contract of employment requires the employer to offer overtime and the employee to work it.

Non-guaranteed overtime: The employee is required to work the overtime, but the employer is not required to offer it.

Travel allowances Taxable payment elements made for traveling time.

Any overtime that the employer is NOT required to work is considered voluntary and outside of this ruling.

Lock v British Gas

The Lock v British Gas ruling stipulated that commission should be taken into account when calculating holiday pay. The Lock case argued there was a barrier to taking statutory holiday due to reduced pay (lack of commission) during periods of holiday. The European Court of Justice (ECJ) found in Lock’s favor.

Rules around the calculation of holiday pay

  1. Calculated on a 52-week average.

  2. Applies to overtime and commission.

  3. Exclude periods of nil payments.

  4. Exclude statutory payments

  5. Applies only to the four weeks holiday associated with the European Working Time Directive, NOT the additional 1.6 weeks in the UK Working Time Regulations

Good to know...