Between 2012 and 2014 courts in Europe and employment tribunals in the UK have ruled that an increasing number of payments must be included by organisations when calculating employees' holiday pay. 

This guide was last updated in October 2014

The rulings have the potential to increase holiday pay costs for businesses and to make it possible for back-dated claims for holiday pay to be made, potentially stretching as far back as 1998.

Most organisations calculate holiday pay based on an employee's basic salary. But the rulings have said that other payments must be taken into account.

What payments must be included?

So far the European Court of Justice (CJEU) has ruled on two kinds of payments  and UK tribunal rulings are also imminent that could introduce major new costs for businesses.

In 2012 the Supreme Court ruled (29-page / 132KB PDF) that a group of British Airways pilots should have two supplements contained in their terms of employment included in calculations of holiday pay, having referred the case to the CJEU. The supplements were a ‘flying pay supplement’ of £10 per flying hour, and part of a ‘time away from base’ allowance that covered meals and other costs.

In 2014 the CJEU ruled that an employee whose "normal remuneration" consists of regular commission as well as a basic salary must have that commission taken into account for the purposes of calculating holiday pay in a case referred by the UK employment tribunal.

The Court said that holiday pay, in principle, must be "determined in such a way as to correspond to the normal remuneration received by the worker".

The real threat: overtime payments

The biggest costs for employers will be related to overtime payments. The Employment Appeals Tribunal (EAT) is shortly expected to rule on three cases that could force employers to include voluntary overtime payments in holiday pay calculations.

Large numbers of employers rely on voluntary overtime and most calculate holiday pay based on basic salaries. An EAT ruling that overtime should be included will not only increase ongoing costs but will introduce the possibility of significant historic claims that could cost a business millions of pounds.

The claims, involving Hertel UK, Bear Scotland Ltd and Amec, also include claims that holiday pay calculations should take account of acting up supplements, allowances and standby and emergency call-out payments. Future claims could argue that bonus payments should be included too.

Legal basis

The claims are based on an employee's rights under the EU's Working Time Directive and the 20 days of holiday that it mandates. The UK's Working Time Regulations add an extra eight days to that total. Claims will only relate to the 20 days mandated in the Directive.

Practical problems

If all these costs are to be included in holiday pay calculations businesses will face significant challenges in retrieving and then processing the data and any claims. The process itself is likely to be expensive, over and above the value of the claims.

Companies should be thinking now about how to deal with this issue in the future, such as reviewing how overtime is worked and preparing for negotiations with trade unions.