The correct approach to the calculation of holiday pay has led to a number of cases being heavily debated.  Arguments as to whether it is a person’s basic salary alone or whether any other form of remuneration such as commission, overtime and bonuses should be included have been presented. As a result, employment judges have been given the unenviable task of considering the intentions of the Working Time Regulations 1998 and employers have been left in the dark as to what the legal position actually is.
 
In the 2014 case of Lock v British Gas Trading Ltd the European Court decided that holiday pay must relate to the workers ‘normal remuneration’ because the objective of holiday pay is to put the worker’s salary during annual leave at the level it would have been had they been at work. In this case, it meant that Mr Lock’s commission had to be taken into account when calculating his statutory holiday pay.  The reasoning behind this case ensures that staff are not deterred from taking annual leave due to the financial implications.
 
In the case of Mr Lock, he was a salesman and his pay consisted mostly of commission, therefore the lack of consideration towards the commission he earned significantly affected the amount of holiday pay he received. The Court found that Mr Lock's commission payments were ‘directly and intrinsically linked’ to the performance of the tasks he was required to perform under his employment contract.
 
The key impact of this case means that employers will need to take into account whether any payments are “intrinsically linked” to the performance of a worker's tasks. If the answer to that question is yes, then holiday pay must be calculated by taking such payments into account. If employers fail to do this then they are at risk of claims being brought against them by employees for breach of contract or unlawful deductions of wages.

The Lock case also has wide-reaching consequences for businesses as employees could complain that their holiday pay should also include other types of remuneration such overtime pay, attendance bonuses and travel allowances. 

In the case of Fulton and another v Bear Scotland Ltd   the Employment Appeal Tribunal decided that regular overtime, which an employee is obliged to perform if it is requested by their employer, should also be included in the calculation of holiday pay.  As in the case of Mr Lock, such overtime was linked intrinsically to the performance of the tasks being carried out under the contract.
 
There are a number of unanswered questions with this decision; what would be considered to be ‘regular’ overtime, why is there a distinction between compulsory and voluntary overtime and over what period of time such payments should be taken into account? The answers to these questions are still developing through the courts. One thing is certain, however, and that is that employers should be taking steps now  to review their policies and contracts in relation to how they calculate holiday pay as it is clear this issue is not going away.  

If you are concerned that your policy on holiday pay does not reflect the current legal position or you are unsure what implications these cases may have on your particular business, speak to us at HRx for expert HR advice.