Employment Appeal Tribunal confirms holiday pay calculation is much wider than basic pay

The Employment Appeal Tribunal has confirmed that all "normal remuneration" and not just base pay must be reflected in the holiday pay calculation for the first 4 weeks of each British worker's holiday taken in any holiday year. 

The Employment Appeal Tribunal (EAT) has published its decision in Lock v British Gas, upholding Mr Lock's claim that his holiday pay should have included results-based commission which made up the majority of his take home pay. In reaching its decision, the EAT rejected British Gas' arguments that previous holiday pay cases including the widely publicised Bear Scotlandcase (which related to overtime) had been wrongly decided. This confirms that holiday pay should be calculated to include all elements of normal remuneration for certain workers.  

What does this mean for employers?

All employers in England, Wales and Scotland will need to ensure that workers with normal working hours (rather than variable hours - those workers have a different system for calculation of holiday pay) receive holiday pay for the first four weeks of holiday in any holiday year that is calculated to include all elements of their 'normal remuneration' and not just base pay.  Many employers had been delaying taking action on holiday pay pending the outcome of this case. However, the decision clearly supports the previously decided cases and means that the following pay elements should now be included in the calculation of holiday pay assuming they are linked to the worker's performance of their contractual duties: 

  • commission
  • incentive, productivity and performance bonuses 
  • overtime that workers are required to work (there is still no case confirming whether voluntary overtime should be included in the calculation, although many commentators believe it to be very likely that regular voluntary overtime will need to be included in future and this would reflect the decision reached by the Northern Ireland Court of Appeal last year)
  • overtime premiums 
  • shift allowances and premiums 
  • standby payments
  • payments for emergency call-outs
  • travel and other allowances treated as taxable pay
  • payments relating to the "personal and professional status" of workers, e.g. increments based on seniority, length of service or professional qualifications

Over what time period should 'normal pay' be assessed?

It is not clear what the correct reference period for averaging pay should be, however it should be 'representative of normal working'.  UK legislation uses a 12 week reference period for workers with no fixed hours. But using such a short reference period may produce a windfall for employees who take holiday shortly after receiving payments such as an annual bonus.  

What are the risks?

Employers that do not calculate holiday pay correctly face claims from workers, including potential class actions, in relation to future holiday pay and holiday pay going back two years.

How can we help?

PwC Legal's employment law experts and PwC's data analysts and reward specialists have developed a market leading holiday pay modelling tool work together to assist companies by providing legally privileged support on managing all aspects of holiday pay issues including:

  • assessing potential historic liability in respect of claims and the future cost of the change in calculation method
  • identifying cost effective solutions
  • using market intelligence to benchmark proposed solutions
  • advising on employment contracts, collective agreements and policies affected by changes to holiday pay
  • supporting on negotiations with trade unions and other bodies
  • helping you understand the payroll and system implications of any changes
  • identifying potential strategies to mitigate future costs
  • defending claims

Why PwC Legal?

We are uniquely placed with complementary teams of specialists in employment law, reward and data modelling to carry out holiday pay compliance reviews and have significant experience in carrying out such reviews for clients across a wide variety of industries.

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