Global Employer Services Newsflash

Potential changes to the calculation of holiday pay


There have been a number of recent cases in the Court of Justice of the European Union (including Lock v British Gas Trading Ltd) which have addressed the way holiday pay is calculated, in particular, whether variable pay such as commission, overtime, bonuses etc. should be included in the calculation. In addition, the Employment Appeals Tribunal (“EAT”) heard three cases at the end of last month which it is hoped will provide further clarity when the judgments are published (expected later this autumn). A fourth case, Neal v Freightliner was settled out of court and didn’t reach the EAT.

Where employers consider they may have got it wrong in the past, they may wish to consider either making a settlement with their employees (at least one large employer for example was recently reported to have taken this approach) or may prefer to amend the way in which they calculate holiday pay now in order to potentially mitigate their exposure to possible future claims.

Are these potential changes to holiday pay relevant to you?

If you pay your employees other types of pay on top of regular salary then the answer is yes! Historically, most employers only brought basic pay into holiday pay calculations. Other types of pay which may now be relevant include overtime and commission, and may include bonuses and other pay components if they are intrinsically linked to the performance of an employee’s role.

What are the issues?

The issues considered last month by the EAT are complex. In addition to the question of how holiday pay should be calculated, the EAT considered other matters such as how far back an employee can make a claim. The statute of limitations suggests 6 years but there are arguments that it could be as far back as 1998 (when the Working Time Regulations were introduced) or the start of their employment if more recent. An employee has 3 months less one day from the date of any underpayment of unpaid holiday pay to bring a claim, although they can then claim for a series of underpayments. However, the EAT will also have to decide if the legislation treats EU leave (20 days) differently from UK leave (additional 8 days), which was not covered by case law. It is unclear whether the potential difference in treatment will cause a break in any series of claims, with the effect of limiting claims that may be made.

Deloitte's View

Some employers may wish to wait for further guidance from the EAT before considering changing their holiday pay calculations. Others may consider it to be good HR/PR to reach a settlement with employees now. Yet others may wish to amend their holiday pay calculations now to include all elements intrinsically linked to performance, which would protect them from any future claims brought by employees (who only have a 3 month window available in which to make a claim).

How Deloitte can support you with these potential changes

We can work with those responsible for this issue in your organisation to:

  • Review extracts from your payroll to determine whether an element of pay could be deemed ‘intrinsically linked’ to the work and performance of the role.
  • Perform detailed back pay calculations and compute any potential liability to your business.
  • Review your policies and procedures to help mitigate possible future claims.

We also recommend that you seek employment law advice and ensure that you consider with your auditors whether any action needs to be taken in respect of provisioning for any historic liability.

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