Calculating holiday pay

In addition to current legislation, a number of recent court judgments should be considered when calculating holiday pay.

This means that the rules employers and workers follow to calculate holiday pay may need to be updated.

Key points:

Guaranteed overtime

Guaranteed overtime is where the employer is obliged by the contract to offer and pay for agreed overtime. Following a judgment in 2004, guaranteed overtime must be included within the calculation of holiday pay.

Non-guaranteed overtime

Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but if they do then the worker is obliged by the contract to work overtime. A 2014 ruling in the case of Bear Scotland v Fulton clarified that:

As a result of this ruling, regular non-guaranteed overtime must now be taken into account in holiday pay calculations.

Limit on a claim for an underpayment

The introduction of The Deduction from Wages (Limitation) Regulations 2014 means that when making a claim for backdated deductions from wages for holiday pay, a two year cap will be placed on all claims that are brought on or after 1st July 2015. This means that the period that the claim can cover will be limited to a maximum of 2 years.

Voluntary Overtime

Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request as there is no contractual obligation on either side to offer or refuse overtime. There is currently no definitive case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay, but several Employment Tribunal rulings have judged that voluntary overtime should be included when undertaken regularly. An Employment Appeal Tribunal decision is expected in 2017 and may provide definitive case law on the inclusion of voluntary overtime in holiday pay.

Commission

Commission is usually an amount of money a worker receives as a result of making sales and can make up some or all of their earnings. Results based commission must be factored into holiday payments for the 4 weeks of statutory annual leave required under European law. There is no requirement to do this for the additional 1.6 weeks of statutory annual leave provided under UK law, or for any additional contractual annual leave allowance. This was confirmed on 22 May 2014 when the European Court of Justice heard the case of Lock v British Gas Trading Ltd.

The Lock v British Gas Trading Ltd case was referred back to the UK Employment Tribunal to consider how commission is calculated into holiday pay for that particular case There were proceeding questioning whether the Working Time Regulation themselves can be read in line with the European judgement. In October 2016 the Court of Appeal ruled - in line with previous Employment Tribunal and Employment Appeal Tribunal judgements - that it could be.

The Supreme Court has refused permission to appeal, meaning these proceedings are now at an end. The case will now return to an Employment Tribunal to decide how such holiday pay calculations must be made and how / if claims can be backdated.  Acas continues to monitor the case and will provide further updates when they are available.

Work-related travel

Work-related travel can have a number of different meanings but for most employment matters, this will usually mean any travel that is made for work purposes that is not a part of a workers commute to their usual place of work. On 4 November 2014 the Employment Appeal Tribunal issued a judgment in a case joined to Bear Scotland v Fulton which covers how holiday pay should be calculated in relation to work-related travel.

Where payments are made for time spent travelling to and from work as part of a worker's normal pay, these may need to be considered when calculating holiday pay.

Holiday pay and sickness

When a worker takes paid or unpaid sick leave, their annual leave will continue to accrue. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they may choose to specify a period where they are sick but still wish to be paid annual leave at their usual annual leave rate.

Calculating holiday pay for different working patterns

No matter the working pattern, a worker should still receive holiday pay based on a 'week's normal remuneration'. This usually means their weekly wage but may include allowances or similar payments. Some of these payments might include the situations described earlier on this page, such as commission.

Payment in lieu of holidays

While workers are in employment, 5.6 weeks of their annual leave (this is the amount all UK workers are statutorily entitled to) must be taken and cannot be 'paid off'. Anything above the statutory allowance may be paid in lieu but this would depend on the terms of the contract.

When a worker's employment is terminated, all outstanding holiday pay that has been accrued but not taken (including the statutory allowance) must be paid.

Further Information

Further information is available from the links at the bottom of the page, but until further clarification is available, employers may wish to seek legal advice based on their individual circumstances. Acas will continue monitoring this situation and will update this page accordingly.

Employers and employees can also sign up for our newsletter to get any further updates: www.acas.org.uk/subscribe and they can also keep an eye out for any updates via Twitter: www.twitter.com/acasorguk.

Acas Helpline Online: FAQs about holiday pay and overtime

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