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Significant changes to holiday pay entitlements

04 Nov 2014

As expected, today’s EAT judgment has held that holiday pay should reflect overtime payments. It has also made an important, but controversial, ruling about retrospective claims.

The key points of the ruling are:

  1. The principle applies to pay for non-guaranteed overtime – this includes “voluntary” overtime (which a worker is free to refuse) and “contractual” overtime (which a worker is obliged to work, although the employer is not obliged to offer it). It would also apply to a payment such as a shift premium for working unsociable hours.
  2. For workers with normal working hours, holiday pay should reflect pay received in a working week, including overtime. For workers who do not have normal working hours, holiday pay should reflect average pay, including overtime, received during the 12 weeks prior. So for workers whose overtime fluctuates, the 12 week average should be used. Additional wording can be read into the Working Time Regulations 1998 to achieve these results.
  3. Retrospective claims for arrears of holiday pay are permitted and can be made as a claim for a series of deductions from wages. However, the series will be broken if there is an interval of more than three months between deductions. In practice, this means that a series can be broken if a worker took their holiday more than three months apart, or if the employer paid the correct amount on one occasion and more than three months elapsed between the occasions when it paid the incorrect amount.
  4. Certain allowances payable to some of the workers in these cases were also “normal” pay that should be reflected in holiday pay, particularly a radius allowance and a travelling time payment.

Impact

The financial impact for many employers will be immediate. Please follow this link to our holiday pay calculator to estimate your possible exposure in respect of overtime pay.

Previous cases have held that other allowances paid to employees and contractual commission payments should also be reflected in holiday pay.

The likelihood of a further appeal to the Court of Appeal is high. Not only is the principle an important one and the financial exposure for employers significant, but there is considerable scope for further legal argument about the EAT’s decision in points 2 and 3 in particular.

Although the decision technically only applies to the basic four weeks of statutory leave, in practice it will be difficult for employers to administer one approach for that part of a worker’s leave entitlement and another approach for the remaining 1.6 weeks.

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