Calculating holiday pay for employees used to be reasonably straightforward. Holiday pay was based upon an average of basic and contractual overtime pay, however the calculation has  become much more complicated over recent years and is now a source of confusion for both business owners and HR professionals.

As working patterns and pay packages have become more flexible, recent legal decisions have suggested that a wider range of variable payments should be considered in calculating the correct level of holiday pay. While there is no definitive guidance to clarify which variable payments should or should not be included in the calculation of holiday pay, the key principle which has emerged is that workers should not be financially disadvantaged by taking their statutory annual leave.

In the 2016 decision in Lock v British Gas Trading the Court of Appeal ruled that holiday pay should include compensation for the loss of results based commission which would ordinarily form part of the employee’s pay. This expanded the scope of the calculation of “pay” and the decision was endorsed last week by the Employment Appeal Tribunal in Dudley Metropolitan Borough Council v Willetts which emphasised that the correct approach should be to ensure that the holiday pay corresponds to “normal” pay (being the pay that the employee would have received had they been at work). In this case the Court accepted that where there was a pattern of voluntary overtime which was “normally worked” the overtime pay should be included in the calculation of holiday pay.

Holiday pay will also be a significant issue in the “gig economy” cases where workers have been incorrectly classified as being “self employed” by their employers in order to deprive them of rights which would apply if they were classified as being “employed”. The European Court of Justice is in the process of considering these cases and in King v The Sash Window Workshop Ltd, ECJ Advocate General Tanchev has advised the Court that employers should provide “adequate facilities to workers” to enable them to take their paid annual leave and where this was not the case, an employee should not be limited in calculating the duration of the period for which they claimed the unpaid holiday pay. In Mr King’s case, he is pursuing a claim for unpaid holiday entitlement over a 13 year period totalling in excess of £27,000.00 and the potential financial exposure for the employer is therefore significant.

The Advocate General’s opinion is not binding upon the ECJ, but if the Court follows the opinion the decision could have significant financial repercussions for employers who have similar employment arrangements for their workers. Employers should begin preparing for the possibility that the Advocate General’s opinion is followed and the significant financial impact which may then arise.


For more advice on the calculation of holiday pay, or for advice on dealing with atypical workers please contact me on 0330 2233288 or use the form below


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