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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 over the past 18 months.

In this article, I focus on two types of payments that have been at the centre of these disputes; commission and 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.
The recent 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 is currently subject to any appeal, due to be heard in December.
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. It is expected that there will be further guidance provided in due course regarding what an appropriate ‘reference period’ should be – for now a sensible starting point would be the 12-week period set out in the Employment Rights Act.
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. 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.