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How much an employee should be paid when they take annual leave is proving to be one of the biggest issues facing employers. In particular, the recent decisions in the cases of Wood and others v Hertel and Fulton v Bear Scotland Ltd and Lock vs British Gas, have generated wide spread publicity on the issue.

Given the range of working patterns which manufacturers operate, they need to consider whether all paid overtime and whether any commissions earned should be included in the calculation of holiday pay. 

Non-guaranteed overtime The Hertel case decided that overtime payments must be included in the calculation of holiday pay when it is regular and forms part of a worker’s normal working hours. 

Irregular non-guaranteed overtime must also be included in holiday pay, but the average overtime worked over a twelve week period must be calculated. 

Voluntary overtime 

Although there are no cases about the inclusion of purely voluntary overtime in the calculation of holiday pay, it is likely that if it is worked regularly (for example, every Christmas, Easter etc) or frequently (eg 2 hours this week, 2 hours in 2 weeks time etc and so on) it should be included. 

What about productivity, attendance or performance allowances?

Allowances which are linked to productivity must be included in the holiday pay calculation. However, allowances which are intended to cover occasional costs, such as travel, do not need to be included. 

Do these requirements apply to all paid holiday?

These requirements only apply to the first four weeks of holiday taken by a worker, as this is the minimum holiday required by the European Working Time Directive.

How far back can workers bring claims?

Workers can bring claims in the Employment Tribunal under the Working Time Regulations or a claim for a series of unlawful deduction from wages. Either claim must be brought within three months of the underpayment. A worker will not be able to claim a series of underpayments if there are more than three months between the alleged underpayments. 

The Deduction from Wages (Limitation) Regulations 2014 will apply to all claims brought after 1 July 2015. 

These Regulations:

  • Limit all unlawful deductions claims to two years before the date the employment claim is brought 
  • State that holiday pay is not incorporated as a term of employment contracts so that workers cannot bring a civil claim for breach of contract in respect of underpayment. 

What should businesses do now? 

Employers can:

  • Review contracts of workers working overtime to establish whether regular overtime is worked
  • Decide whether to limit holiday pay for overtime to the four week minimum period provided by the European Working Time Directive. 
Manufacturers with seasonal fluctuations can: 
  • Specify when employees can take holiday so that the first four weeks of holiday isn’t taken with twelve weeks where overtime has been worked. Employees should, however, take advice about possible discrimination claims
  • Set a more appropriate reference period to calculate holiday pay
  • Set up a “task force” to deal with holiday pay
  • Re-structure the workforce so that it is not so reliant on seasonal overtime. When doing this, employers must be sure to comply with the relevant legislation about making such changes
  • Refuse to include voluntary or irregular overtime in holiday pay until the law decides otherwise.

Key Contact

Glenn Hayes