Blog

Are you calculating your employees’ holiday pay correctly?

A recent ruling by the European Court of Justice could lead to changes in how employers are required to calculate holiday pay.

Currently holiday pay in the UK is calculated on the basis of a week’s pay. A week’s pay is usually held to mean basic salary only, excluding payments such as working allowances, expenses, overtime, commission and bonus payments.

Three recent cases; British Airways plc v Williams and Others; Neal v Freightliner Ltd and Lock v British Gas Trading Ltd and Others all indicate that using basic pay only for calculations is not correct.

We are still waiting for a definitive statement on how to calculate holiday pay from the European Court of Justice. However, if the law develops in line with the above cases then the UK’s interpretation of holiday pay is wrong and calculations should take account of payments such as overtime and commission.  The underlying principle is that employees should not be worse off because they have taken a holiday as this could deter them from using their full holiday entitlement.

If the law develops in the way it is expected to then there are huge implications for employers, not only with respect to the calculation of holiday pay, but also liability for retrospective payments.

Under the Working Time Regulations, holiday pay is considered wages, and failure to pay the correct amount allows an employee to bring a claim of unlawful deduction of wages under the Employment Rights Act.

The current time limits for backdated claims are five years in Scotland and six years in England. However there is a potential argument that there should be no limitation on this period which could lead to claims going back to the introduction of the Working Time Regulations in 1998 or the start of the employee’s employment, whichever is more recent.

So what can employers, whose workers’ remuneration is made up of basic salary and regular variable payments, do to minimise their liability?  Well there are a number of options including:

  • Negotiating with staff to agree a level of the backdated holiday pay due and then make the payment.  This is essentially what John Lewis and Waitrose did in 2013 when they hit the headlines by paying £40million to staff in backdated holiday pay.
  • Start calculating holiday pay now to take account of regular variable components. Employees only have three months from the date of the last underpayment to bring an unlawful deduction from wages claim so this would secure a time limit for potential claims.

If you would like to discuss the changes to holiday pay calculations or any other payroll matters please get in touch with our PAYE Manager Dianne Bradshaw at wages@gwayre.co.uk or the partner in charge of your affairs.

Contributed by Hazel Smith, Partner