It has long been an established principle in the UK that holiday pay for workers on fixed hours is based on the person’s normal weekly pay for normal (contracted) hours. In other words, even if a person worked voluntary overtime quite regularly, or earned sales commission, their holiday entitlement (and holiday pay) would be based only on their basic contractual hours and pay. (For folk on varying hours an average of the previous 12 weeks is used.)

This approach has been questioned and upended through a series of cases in UK tribunals and in Europe over the past year, in which it was ruled that voluntary overtime (non guaranteed) should indeed be included in holiday pay. Another case (Lock v British Gas) held that commission should be included in holiday pay.

Those decisions raised the spectre of expensive backdated claims for unpaid holiday pay stretching back many years, and have caused some alarm among employers and the UK government.

Three key cases* have recently been heard by the Employment Appeal Tribunal, but the decisions are not expected until October or November 2014. Even then, there is likely to be an appeal by the losing side so it may yet be quite some time until we have a clear steer. Some Trade Unions are rattling their swords, anticipating and filing claims.

Learned opinion seems to be that it is likely that the UK will need to amend legislation to change the definition of normal pay for calculating holidays. In other words, that non contractual overtime and commission should indeed be included.

In the meantime there is currently no legal requirement to include overtime payments in your employees holiday pay. You may decide to sit tight and wait and see how the decisions play out, or more proactively take legal advice on how to deal with the uncertainty and how to mitigate risk to your organisation.

* Bear Scotland v Fulton / Hertel (UK) v Wood / Amec Group Ltd v Law

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