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Where are we on holiday pay?

06 July 2015 #Employment

So, with the summer holiday season upon us, where are we now exactly on the issue of the calculation of holiday pay? Can employers move forward in implementing changes to how holiday pay is calculated in the knowledge that there is sufficient legal certainty on the issue?

If you are starting to become a little confused having taken advice in light of the Bear Scotland and others last November, which seemed to be settling the issue at last, only to hear of further cases and appeals on holiday pay, then now is a good time to take stock before you head off on holiday yourself.

If you have taken the approach already that all forms of overtime, allowances, shift premiums and similar payments together with commission should be included in the calculation of all holiday pay in any event as a matter good practice, then the current legal wrangling may not concern you too much. However, many employers, particularly those with significant back pay issues and perhaps legal claims to contend with, do need to understand the strict legal position and, of course,  most will need to know how generous or otherwise they are being in relation to the statutory minimum requirement. Of course, it is often not just a matter for the employer itself what approach should be taken on holiday pay. Frequently, an employer’s client may have the final say in the matter.

Could the fundamental issues on holiday pay established by the courts change?

The first point to make is that the fundamental requirements of EU law that the courts, particularly the European Court of Justice, have established in relation to holiday pay under the Working Time Directive are very unlikely to change, subject of course to the outcome of the UK referendum on membership of the European Union itself. Leaving that aside, the Working Time Directive requires, as established by the ECJ in the British Airways plc v Williams and the Lock v British Gas cases, that workers  must receive their “normal remuneration” during periods of annual leave pursuant to the Directive.  Normal remuneration must include all sums intrinsically linked to the performance of tasks that the worker is required to carry out under the contract of employment.

The vexed questions now facing the UK courts and employers are what is meant by “normal remuneration” and “intrinsically linked” and “required to carry out” in the context of the UK Working Time Regulations which implement the Directive in the UK. Unfortunately, the courts and tribunals can only deal with the issues on the basis of the facts of each particular case as they arise. We have had the answer from the Employment Appeal Tribunal on the issue of “non-guaranteed” compulsory overtime in Bear Scotland and others. It must be remembered however that these cases do not say that all such non-guaranteed overtime must be included in the calculation of holiday pay, rather that  overtime has to be paid for a sufficient period of time to justify the label of “normal pay”.

Bear Scotland

The Bear Scotland cases also dealt with, to varying degrees (some at tribunal level) other elements of pay such as travel allowances, productivity and attendance bonuses, standby and emergency call-out payments and acting up supplements. They also dealt with the issue of backdating of claims, establishing that a gap of more than three months between unlawful deductions of holiday pay break the chain of ongoing deductions so as to limit liability accordingly.

A key issue that was not before the EAT in Bear Scotland and others however, was voluntary overtime. I return to that issue later.

The Bear Scotland cases were not appealed to the Court of Appeal by the employers or the claimants/unions concerned, despite there being opportunity to do so. That brought about a relatively settled position, recognising of course that an appeal to the Court of Appeal may have brought about a more settled position. It has been known for the Employment Appeal Tribunal to arrive at differing and conflicting decisions in different cases.

This leads me to the next key point. There is no known case going through the employment tribunal or EAT system at present seeking to challenge the fundamental issues in Bear Scotland in relation to the inclusion of overtime in holiday pay under the Working Time Directive. The indications are that it is very unlikely that such a challenge will be brought and that any such challenge would not have any prospect of success, in light of the previous case law in Europe. This was a key factor in the employers not appealing in Bear Scotland and others.

The Lock appeal to the EAT

However, as reported back in May there is an appeal going ahead, the further appeal in Lock v British Gas, which does challenge part of the EAT’s judgment in Bear Scotland and others. This is the part of the judgment where the EAT found that in order to give effect to the EU Working Time Directive, the UK Working Time Regulations can be interpreted purposively. When the Lock case was remitted to the employment tribunal back in March of this year, the tribunal found  that by adding wording to the Working Time Regulations as a matter of legal interpretation, this resolved the problem of giving effect to the Directive. Importantly, this followed the approach of the EAT in Bear Scotland and others. British Gas are now seeking to argue that such wording cannot be added to the Working Time Regulations by the courts and that the Regulations do not implement the Directive. In other words, if this appeal in Lock were to succeed, that would deprive the Bear Scotland and others cases of any meaning or effect in relation to the Working Time Regulations, as they currently stand. The regulations (which cannot have retrospective effect) would first need to be amended by the government.

So until the appeal in Lock is heard later this year, (it remains unknown as to when at the moment), and judgment is given, there will remain legal uncertainty on the issue. It should also be recognised that whatever the outcome of the appeal is, there is the prospect of a further appeal to the Court of Appeal. In practice, if the matter goes to further appeal, it could be the back end of 2016 or 2017 before it is resolved.

Voluntary overtime

Coming back to voluntary overtime, the other case which has caused a degree of confusion in relation to Bear Scotland and the overtime issue, is the one in the Northern Ireland Court of Appeal, Patterson v Castlereagh Borough Council. In that case, the tribunal  had concluded that, as a matter of principle, voluntary overtime should not be taken into account in statutory holiday pay. On appeal last month, the employer conceded, based on Bear Scotland, that the tribunal had made an error of law. The Northern Ireland Court of Appeal went on to find that there is no reason in principle why voluntary overtime should not be included in statutory holiday pay (under the Directive) for the purposes of the Working Time Regulations (Northern Ireland) 1998 (which are substantively the same as the Working Time Regulations 1998).

It will be a question of fact for each tribunal to determine whether or not overtime is "normally" carried out and whether overtime pay can properly be described as forming part of "normal remuneration" for these purposes. Importantly, the court did not reach a decision on whether voluntary overtime should have been included in this particular case, hearing no argument on the point. Hence the case is of very limited importance and Bear Scotland remains a more relevant authority on the issue of voluntary overtime as well as compulsory overtime. In any event, Northern Ireland cases are not binding in England and Wales.

So, the points to note are:

  • The Lock appeal alters the landscape on holiday pay, raising the prospect that although employers will need to alter how holiday pay is calculated in light of Bear Scotland and others, it may (we emphasise “may”) not be necessary to do so until there is an amendment to the Working Time Regulations. Some employment tribunals are staying holiday pay claims pending the outcome of the case.
  • Employers should continue to review and calculate potential holiday pay liabilities and take steps to mitigate them. The chain of ongoing deductions should be carefully considered.
  • When putting agreements in place in relation to holiday pay, for example with unions, consideration should be given to building in flexibility provisions and making the agreement time limited in view of the potential for further and ongoing legal developments.
  • It remains the case that any gap of more than three months between unlawful deductions will break the chain of deductions going back in time. In any event, claims filed with tribunals after 1 July 2015 cannot go back more than two years, under new legislation now in effect.
  • The issue of inclusion of commission in holiday pay is also subject to appeal in Lock. However, that issue also relates to the ability of the Working Time Regulations to be read in accordance with the Directive and does not seek to challenge the fundamental point established by the ECJ in Lock
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