United Kingdom: The Current Position on Holiday Pay.

United Kingdom

The Current Position on Holiday Pay.

Just how much should employees be paid during annual leave?

Should holiday pay be limited to basic salary or should additional sums be included on the basis they are all part and parcel of ‘normal remuneration’? This fundamental question has been put before courts across the UK, not to mention our European counterparts.

The law appears to be moving towards paying “normal remuneration” rather than basic salary only. Normal remuneration could include elements such as overtime or commission. The rationale behind this change is in ensuring that employees are not dissuaded from taking annual leave due to a fear of a drop in pay. Many will be familiar with the current mantra; holiday pay should include payments that are intrinsically linked to the performance of the tasks employees are required to carry out in their contracts of employment. Fair enough you might say, although exactly what this means is unclear.

Previously in Evans v Malley Organisation Limited, the Court of Appeal held that Mr Evans (whose pay varied on the results he achieved in his sales role) was only entitled to basic pay only during holiday. This position is being challenged. In Lock v British Gas the ECJ held that where an employee’s remuneration includes contractual commission, calculated by reference to the sales that person has achieved, holiday pay cannot be based on basic salary alone. In fact, holiday pay should put the employee in a position during holiday that is comparable to periods of work.

The old “basic pay only” approach is also being challenged in Neal v Freightliner and the EAT is expected to decide whether Mr Neal’s holiday pay should include sums equivalent to voluntary overtime.

Bear Scotland Ltd v Fulton, Baxter Hertel (UK) Ltd v Wood and Amec Group Limited v Law also deal with the thorny issue of overtime. The Tribunal in Wood held that the employee was entitled to overtime and bonus payments in their holiday pay. These cases are being appealed and written judgment is expected soon.

Whilst the position may remain uncertain for some time, commentators fear that the UK government could be ‘punished’ by way of Francovich damages for not correctly implementing EU law. The next six to 12 months will therefore be crucial in determining just how much to pay employees during annual leave.

Conversely, Richard Branson recently announced that staff at Virgin will be allowed to take as much holiday as they want, when they want, providing that they feel “100% comfortable that they and their team are up to date on every project and that their absence will not in any way damage the business – or, for that matter, their careers!” Placing the onus on employees to manage their time is all well and good, but will this really assist in the overarching aims of providing time off? Providing staff are not prevented from taking leave for fear of a drop in pay, this might just work!