The Employment Appeal Tribunal has ruled that overtime and regular commission payments should be used as part of the calculation of an employee's holiday pay.

Workers in the UK are entitled to 28 days off per year for which they receive pay. Most employers simply pay basic pay to workers on holiday. But for people who regularly earn large amounts of overtime this can mean that their earnings drop when they go on annual leave.

However, this week's ruling only applies to 20 days' holiday (4 weeks) which is the proportion of UK annual leave that employees are entitled to under European law. It does not apply to the full UK holiday entitlement of 28 days per year (5.6 weeks). This is potentially very confusing and is a direct result of the ruling relating to European Law.

This decision is being regarded as one of the most important employment law decisions of recent years and potentially affects a large number of UK employers. No guidance has been given as to how employers are expected to work out the "normal pay" for the purposes of calculating holiday pay - whether an average should be taken over 12 weeks or 12 months. It will be for the Government to make this decision.

However there is some good news for employers. There was much talk, before the ruling came out, of Unions claiming backdated holiday pay from as far back as 1998. It has been deemed that this cannot occur if there has been a three-month gap between payments of holiday without overtime. This means that employees can only make a claim if they have taken a holiday within the last three months. This gap effectively "breaks the chain".

In the meantime we advise the following:

• Examine the business need for regular overtime, perhaps looking at Time Off In Lieu or annualised hours to avoid the need for overtime to be part of "normal" practice.
• For those employees who are due to go off on holiday from now, examine earnings for the previous 12 weeks (until a firm decision has been taken) and pay holiday pay based on "average" earnings for that period of time.
• When calculating this average payment, the ruling currently only covers 4 of the 5.6 weeks' annual holiday period and therefore payments can be pro-rated accordingly.
• If employees request backdated holiday payment, look at the date of the last holiday period. It may be that if the holiday has been taken in the last three calendar months, payment should be recalculated to include any overtime earned in the 12 weeks before the date of the holiday. This will limit future claims.
• This week's decision will almost certainly be appealed and will likely take several years to finally resolve. However, many employers recognise that they should try to deal with this issue well before the protracted litigation is concluded.

Following this ruling, Business Secretary Vince Cable has announced that he is setting up a new taskforce to assess the impact of the ruling on businesses. As news emerges we will keep you updated.

If any SWA members have any queries or require further information, please contact 121 HR Solutions.

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