What employers need to know about calculating holiday pay

Employers could face significant extra costs after a series of tribunal cases that challenged the standard calculation of holiday pay under the Working Time Regulations.


In July, the Confederation of British Industry (CBI) warned that these costs could run into billions of pounds and could even bankrupt some organisations. Katja Hall, deputy director-general at the CBI, said: “Moving the legal goalposts in this way is unacceptable.

“We need the UK government to take a strong stand and do all it can to remove this threat. Otherwise, we face the real prospect of successful firms in this country going out of business, with the jobs they provide going too.”

The issue first arose in May 2014, in the case Lock v British Gas Trading Limited and others, when the Court of Justice of the European Union (ECJ) held that the Working Holiday Directive should require commission to be taken into account when calculating holiday pay.

A spokesperson from British Gas said the utilities organisation is examining the issue raised by the case as part of a wider review of employee incentives, and is working with trade union representatives to design future staff incentive schemes.

Adam Lambert, employment partner at Clyde and Co, said: “The cost for employers could be high, but employers may take some comfort from the fact that the ECJ leaves it open as to precisely how commission is taken into account.

“We may need to see changes to the UK Working Time Regulations to clarify how employers need to make the calculations.”

In June 2014, another case, Bollacke v K+K Klass and Kock, further complicated matters when the ECJ ruled that an employee who dies with outstanding holiday pay should be paid this after their death.

Matters moved on again in July 2014, when the Employment Appeal Tribunal heard three more cases on holiday pay. One, Bear Scotland v Fulton and Baxter, focused on whether overtime pay or shift allowances should be included in holiday pay calculations.

Louise Mason, senior associate at Hogan Lovells, said: “Not only are organisations likely to face significantly higher holiday pay bills in future, to reflect items such as commission and regular overtime, but they could also face claims for underpaid holiday stretching back over a period of years.

“The immediate priority for employers will be to get their house in order going forward. Once the EAT judgements in Bear Scotland, Hertel UK and Amec Group come out, we will have a clearer idea how regular overtime payments and other allowances should be treated.

“That should allow organisations to quantify how holiday pay should be calculated in future. The more difficult issue will be deciding how to tackle the prospect of claims in respect of previous years, whether to tackle the issue head-on, or wait to see whether tribunal claims are in fact brought.”

The cases

What is the Working Time Directive?

The Working Time Directive provides that every employee has the right to paid annual leave. It is implemented into UK law by the Working Time Regulations 1998, which provide that an employee is entitled to be paid during statutory annual leave at a rate of a week’s pay for each week of leave.