Are you calculating holiday pay correctly?

Victoria Albon and Kate Coppack reveal what should be taken into account when it comes to holiday pay

Calculation of holiday pay can be quite complicated, but the general position is that all elements of 'normal remuneration' which are 'intrinsically linked' to the performance of tasks a worker is required to carry out under their contract of employment should be taken into account. 

In the recent case of Flowers v East England Ambulance Trust, the Employment Appeal Tribunal (EAT) considered whether overtime which was voluntary and non-guaranteed should be included in the calculation of holiday pay. The case turned on the interpretation of the Working Time Directive (WTD) and relevant positions of the NHS Terms and Conditions of Service (Agenda for Change). The decision itself is specific to the public sector and, in particular, NHS staff working under Agenda for Change. However, it is a useful reminder that:

  • the overarching principle for calculating holiday pay is whether it reflects 'normal remuneration'. Whether there is an intrinsic link to the tasks performed under the contract is relevant but not decisive;

  • non-guaranteed and voluntary overtime may both need to be included in the calculation of holiday pay, depending on the regularity with which they have been paid and the construction of the contract; and

  • employers should ensure contractual terms in relation to the payment of holiday pay are clear and that holiday is paid in accordance with those terms and the law.

Key considerations 

The underlying principle under WTD is that workers would be deterred from taking holiday if they were paid less while on leave. A worker should receive the same amount of pay on holiday as they do while at work. For workers who have normal working hours and whose remuneration does not vary with the work done, this is a simple calculation and they should be paid their normal pay for periods of annual leave. For other workers, this is more complicated. When calculating holiday pay for these individuals, employers should use the guiding principles set out below. 

1. In relation to overtime payments:

  • overtime which is both guaranteed and compulsory constitutes 'normal working hours' under the Employment Rights Act 1996 and should be included in the calculation of holiday pay for the statutory minimum of 28 days under the Working Time Regulations 1998;

  • overtime which is compulsory but not guaranteed should be included in the calculation of holiday pay, but this is only required for the 20 days conferred under the WTD;

  • voluntary overtime should be included in the calculation of holiday pay where it is paid sufficiently regularly to qualify as 'normal remuneration'. This should not be excluded just because it is voluntary. Again, this is only required for the 20 days conferred under the WTD.

2. Where a worker receives commission relating to performance of their duties, this should be included in the calculation of holiday pay for the 20 days given under the WTD. If this did not happen, the worker would be at a financial disadvantage when taking statutory holiday as no commission is generated during their holiday period. 

3. Regularly paid incentive bonuses, shift allowances, standby or on-call payments, work-related travel allowances, and all other elements of taxable remuneration paid on a regular basis all fall within the definition of ‘normal remuneration’. These elements of pay should therefore be included in the calculation of WTD holiday pay. 

4. Benefits in kind, non-performance related bonuses, reimbursement expenses and one-off bonuses do not need to count towards the calculation of holiday pay. Overtime which is worked infrequently also does not need to be taken into account.

5. It is unclear what reference period holiday pay should be calculated over. In the absence of any contractual term to the contrary, 12 weeks is probably reasonable, but this is not a strict requirement.

As it stands, employers can pay basic salary to employees for the eight additional days holiday under the WTR and for any additional contractual holiday.

Employers should consider any discrimination issues in the calculation of holiday pay (for example, where an employee's weekly pay prior to holiday is lower than normal because of their sickness absence – and that may be because of a disability – consideration should be given to whether the holiday pay should be adjusted so that the employee is not disadvantaged).

Victoria Albon is an associate and Kate Coppack a trainee at Dentons