However, recent court decisions have challenged whether this is the right basis for calculating holiday pay under the Working Time Directive and the courts have confirmed that it is not.
Payments such as commission, shift allowances and non-guaranteed overtime must be included in the calculation of holiday pay for at least the first 20 days of an employee's annual holiday entitlement. It is not entirely clear whether truly voluntary overtime is caught by this ruling.
However, if voluntary overtime is worked regularly then it is highly likely to have to be included.
The next question for employers is what reference period to take as the average for these supplemental payments? An appeal being heard in February 2015 is likely to decide this issue. The range varies from 12 months to 12 weeks. I believe that the court is likely to hold that a 12-week reference period is appropriate.
The cost to employers for holiday is thus going to increase for at least 20 days in each holiday year although, in practice, employers are likely to apply this ruling to the whole annual holiday entitlement. One of the major concerns for employers was the prospect of employees being able to claim backdated amounts for the miscalculation of holiday pay for the period dating back to 1998. However, the latest judgment (Bear Scotland Ltd v Fulton) has held that this will not be allowed (although this point is likely to be appealed).
The advice to all UK employers is to ensure that future holiday payments are calculated on the correct basis going forward. Further, if employees have brought claims for historic unpaid holiday, employers should be very cautious in settling such claims as there may be no liability for these historic claims.
