Holiday Pay – what is ‘normal’?

Under the Working Time Directive, workers are entitled to receive their ‘normal remuneration’ during a period of annual leave.

Whilst that all sounds straightforward enough, the question of what should be included as part of a worker’s ‘normal remuneration’ has been the subject of a number of high profile cases.

In this article, I focus on two types of payments that have been at the centre of these disputes; commission and overtime.

Overtime

In the case of Bear Scotland Ltd v Fulton it was confirmed that ‘non-guaranteed’ overtime (that is, overtime that the employee is required to work if required, but which the employer is not obliged to provide) should be taken into account when calculating workers’ holiday pay.

The Bear Scotland case did not specifically address the issue of ‘voluntary’ overtime (where the employee is not required to work the overtime offered), but a recent decision from the Northern Ireland Court of Appeal held that there is no reason in principle why voluntary overtime should not be included in the calculation of statutory annual leave.

This has since been further clarified by Dudley Metropolitan Borough Council v Willetts and others which confirmed that voluntary overtime payments should be included in holiday pay under the Working Time Directive provided it has been paid over a sufficient period of time on a regular or recurring basis (this is a matter of fact for tribunals).

The Government has further explained this with its guidance published on 1 January 2024.  Read more here 

Commission

The case of Lock v British Gas established that employers must take account of commission when calculating holiday pay. The European Court of Justice (ECJ) concluded that without commission being taken into account a worker may suffer a financial disadvantage when taking annual leave.

It should, however, be noted that this case was subject to an appeal, and once heard, the EAT held that the pay should be limited to contractual results-based commission. Further guidance has been published by the Government and our comments can be found in the link above.

What does this mean?

The bottom line is that a worker should receive holiday pay based on a week’s ‘normal remuneration’. For workers with fixed working hours and fixed pay, this will be easy to calculate. For workers with varying hours and pay (i.e. those receiving commission or overtime as above) holiday pay will need to be calculated using the worker’s average pay over a set reference period.

Until the 5^th April 2020, a reference period of 12 weeks was used but the Government’s ‘Good Work Plan’ altered this to 52 weeks so as to level the playing field for those workers whose earnings fluctuated though the year.

Can workers claim back pay?

Following these high profile cases, an understandable concern for many businesses was whether workers could issue claims for underpayment of holiday pay dating back a number of years. The judgment in the Bear Scotland case provided some relief by concluding that a gap of three months or more between the underpayment of holiday pay was sufficient to break a ‘series’ of deductions.

However, In Agnew, the Supreme Court held that a three-month gap did not break a series of deductions, and that, if it is not practicable to distinguish between different types of leave, then all holiday should be seen as a composite “pot”, wherever it was derived from. Agnew further expanded and stated that an employer that wants to protect itself from future claims and minimise the likelihood of any retrospective claims will need to bring the series of deductions to an end, rather than just interrupting them.

The Government has also sought to limit the potential for historical liability by introducing the Deduction from Wages (Limitation) Regulations 2014 – this legislation provides that, for claims issued from 1 July 2015, employees cannot go back further than two years with their claims.

For further advice or information  please contact the Employment team on 088 088 6004