Holiday pay: further clarification

Recent Employment Tribunal decisions have changed the way employers are required to calculate holiday pay. Whilst holiday pay for many employees will be easily identified by reference to salary, those with variable pay require employers to calculate their applicable rate of holiday pay to include payments such as commission and bonuses ordinarily paid during the course of employment.

The Employment Appeal Tribunal (“EAT”) in Dudley Metropolitan Borough Council –v- Willetts and Others  has upheld an Employment Tribunal’s finding that a group of Council employees were entitled to have payments for voluntary overtime, on-call allowance and our of hours payments counted for the purposes of calculating holiday.

The EAT found that the payments the claimants argued should be included in holiday pay calculations were paid with sufficient regularity and on a recurring basis such that they were considered part of “normal pay”.  This finding expands on the principle that holiday pay should represent normal pay as developed in the cases of Bear Scotland Ltd –v- Fulton and Others, Williams and others –v- British Airways and Lock –v- British Gas.

What counts as normal pay is a question of fact and degree but it is clear from the developing line of case law that tribunals are required to consider what an employee is paid for their normal work when determining what rate of pay they are paid whilst on holiday. 

Employers should consider whether they are failing to include elements of normal pay in calculating holiday pay or risk a build up of underpayments which may become a significant future liability.

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