Background
Payment for holidays should be made at the rate of a “week’s pay” for each week of holiday taken under the Working Time Regulations 1998. Where the worker has fixed working hours (i.e. the hours worked and pay received does not vary under the contract), then payment for holidays should be made at the same rate as the worker’s normal pay and calculated on the basis of the worker’s normal hours of work.
However, a series of decisions by the European Court of Justice and the UK courts affect the calculation of statutory holiday pay during the four-week holiday entitlement in respect of overtime payments, commission and other allowances.
The general principle in relation to the 4 weeks’ holiday entitlement under the Working Time Directive is that a worker should receive the same pay while they are on holiday as they would if they were at work, so that they shouldn’t be placed at a financial disadvantage when taking holiday.
In relation to the additional 1.6 weeks’ holiday to which workers are entitled in the UK, where a worker has fixed hours and their rate of pay does not vary with the amount of work done or results, this is calculated according to the contract of employment, so that only contractual overtime that employers are contractually required to provide, and the worker is contractually required to work need be included in the calculation of this additional holiday.
Recent Court of Appeal Decision
The Court of Appeal, in a case concerning voluntary overtime worked for an NHS ambulance service, has confirmed that employers should include all voluntary overtime worked in holiday pay calculations in respect of the four-week statutory holiday entitlement under the Working Time Directive when the overtime worked is “sufficiently regular and settled.” The Court of Appeal noted that the overarching principle of the Working Time Directive means holiday payments should "correspond to the normal remuneration received by the worker" while working, as established in European caselaw. There is no current guidance on how to decide if an employee’s voluntary overtime is “sufficiently regular and settled.” It will be for the fact-finding employment tribunal to determine in each case whether the overtime is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration.
For workers whose pay varies, for example, due to working regular voluntary overtime, or where they receive a regular bonus or commission payment, in respect of the four-week holiday entitlement, a “week’s pay” for holiday pay purposes is calculated by taking the average pay received over the previous 12 working weeks where pay has been received.
Until further caselaw clarifies this, (or until April 2020, whichever is sooner), the rule set down in the Employment Rights Act 1996 for workers with variable pay which provides that the previous 12 weeks worked should be taken into account when calculating statutory holiday pay, is likely to be the appropriate reference period to use. However, it should be noted that using this method may have drawbacks, particularly where there are seasonal fluctuations in the levels of overtime worked.
For this reason, from April 2020, under new legislation that applies from that date, the reference period for calculating average pay for statutory holiday pay purposes increases to a year (in place of the current 12 weeks reference period).
Where a worker considers their right to receive statutory holiday has been breached, in most cases, they would need to pursue a claim before an employment tribunal within 3 months of the date of the breach. Statute limits the time a worker can claim unlawful deductions from wages in connection with unpaid or underpaid statutory holiday pay to no more than two years from the date of the last underpayment/deduction or series of underpayments/deductions from holiday pay.
As always, if you have a legal query please get in touch with the FSB Legal Helpline on 0345 0727727 and we'll be happy to assist you.