Nikki Duncan
Posted on 5 Nov 2014

Holiday pay ruling: how much?!

On 4 November 2014, the Employment Appeal Tribunal (EAT) confirmed that the pay calculation for the 4 week statutory minimum paid holiday should take account of overtime pay, even if that overtime is not guaranteed.

This follows a line of recent EU cases which have decided that all 'normal remuneration', referable to actual work carried out, should be taken into account. That includes sales commission, individual performance-related bonuses, and attendance allowances. The rationale is that, otherwise, there may be a disincentive to taking even that minimum holiday, which is viewed as a particularly important principle of EU social law.

There is, therefore, nothing particularly surprising about the EAT's decision, but there remains a great deal of concern about what has been described as the 'ticking time bomb' of potentially horrendously large claims for back pay, which could in theory go back to 1998, or the worker's later start date.

The EAT has provided some comfort to employers on this point, in deciding that any claims relating to holidays more than three months apart will break continuity.  However, that ruling is subject to a likely appeal to the Court of Appeal but, thankfully, not also to the European Court, which would only prolong the uncertainty.

In the meantime, the appropriate reference period for irregular overtime payments, or indeed irregular payments of all other types of 'normal remuneration', is still to be decided.  The European Court has said that it must be a 'reasonable reference period', but has left the detail of that issue to be determined by individual Member States.

Therefore, whilst employers might reasonably expect to look to the normal 12 week reference period, for assessing variable pay for holiday pay purposes, there must be a real risk that a 12 weeks' reference period will be held to be insufficient if that fails to pick up less regular payments.

The EAT has also decided that payments for work-related travel time (as opposed to purely reimbursement of travel expenses) also attract holiday pay.

The fact that these decisions only apply to the 4 week EU statutory minimum raises the possibility of two-tier holiday pay calculations going forward, with full payment for the first 4 weeks, and a lower sum for the remaining 1.6 weeks of the UK Working Time Regulations.  That could be reinforced with appropriate contractual clauses making it clear, for example, that the first 4 weeks of holiday in any holiday year will be deemed to be the statutory minimum, attracting potentially higher rate holiday pay than for the remainder of the annual leave. 

Without such contractual provisions, there must be uncertainty about how particular periods of leave will be classified when deciding historic pay claims.  Plainly, employers may want to argue that holiday which would break continuity was the 1.6 weeks top-up, and was therefore properly paid. Whether the Courts would imply such a term is questionable, but one can immediately see that this is just one of several possible test points which are likely to be taken in follow-up cases.  

In the meantime, the Government has responded to the EAT's ruling with a prompt announcement of a task force. Apparently, this consists of representatives of 7 employers' organisations who have been actively lobbying for some time for the Government to step in, for fear that smaller businesses could go under, and others could suffer an estimated 4% average increase in their staffing costs.  However, the fact remains that, whilst the Government may be able to tinker around the edges, and hopefully provide greater certainty about issues such as representative reference periods, they will not, short of leaving the EU, be able to side-step the basic minimum EU holiday rights.