By Sybille Steiner, Partner and Employment Specialist, Thomas Eggar LLP

In the UK, holiday pay used to be calculated based upon a worker's basic salary without including overtime, commission or similar payments. A series of recent judgments have made it clear that European laws (which normally trump UK laws) require employers to factor in overtime and commission payments, as well as anything else a worker would normally receive if they were working. This is so they are not dissuaded from taking holiday by being paid less when on holiday than when at work.

Last week the Employment Appeal Tribunal (second tier tribunal) handed down an important judgement about how holiday pay should be calculated in the UK. The Employment Tribunal Appeal decided that all elements of a worker’s normal remuneration – including payments in respect of non-guaranteed overtime – must be taken into account when calculating holiday pay (AMEC Group Ltd v Law and related appeals).

The key points for employers are:

1. Holiday pay should no longer be calculated on the basic salary or basic hours’ pay.

2. Workers and employees should be paid their normal remuneration including non-guaranteed overtime pay, allowances and commission payments which are intrinsically linked to the person’s work.

3. This applies during the basic four weeks' leave granted under the Working Time Directive, not to the additional 1.6 weeks under the Working Time Regulations.

4. A large number of UK workers may now have claims for unlawful deductions from wages if they have been paid the four weeks’ holiday pay representing only their basic salary or basic hours.

5. The positive is that if there has been a gap of more than three months in any alleged series of deductions, any claim for the earlier deductions will not be accepted. An unlawful deduction from wages claim can only be brought within three months of the last deduction in any event.

This decision will be appealed and a final decision could take years. In the meantime, employers will face a higher cost for holiday pay.