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Clarification of the law relating to holiday pay

In a decision published today, the Employment Appeal Tribunal has clarified various aspects of ongoing disputes of how to calculate holiday pay.

The key messages for employers are:

1. Payments for "Non-Guaranteed Overtime" need to be taken into account in holiday pay calculations relating to the four-week paid holiday period set out by the EU's Working Time Directive - but not apparently to the additional 1.6 weeks' paid leave entitlement under Reg 13A of the UK's Working Time Regulations 1998.

"Non-Guaranteed Overtime" is where the employer can ask the employee to work overtime, and the employee then has to work that overtime. This contrasts with "Guaranteed Overtime" (where the employer has to provide overtime) - payments for that also have to be taken into account in calculating holiday pay - and "voluntary overtime", which is where the employer does not have to provide overtime, and the employee does not have to work any overtime offered. The position on voluntary overtime is unclear.

2. Allowances which are genuinely expense payments should not be included within holiday pay calculations, but where those allowances are instead intrinsically linked to the performance of the job, or relate to the employee's personal or professional status, then those allowances should be taken into account when calculating holiday pay.

It is likely that there will be a great deal of fact-specific litigation about whether specific "allowances" paid to employee should be included in holiday pay calculations or not.

3. A Tribunal claim for alleged holiday pay underpayment must be brought within three months of the alleged underpayment. Earlier alleged underpayments can only be included within that claim if they were made in the period of three months leading up to the last alleged underpayment. Any earlier alleged underpayments will not be regarded as in the same "series" of underpayments.

This effectively means that, where there is a gap of three months or more between alleged underpayments, the earlier underpayments will be regarded as being "out of time" - unless employees can show that it was "not reasonably practicable" to bring claims within three months of each alleged underpayment.

This will come as a considerable relief to many employers who were worried that they could have to fund claims going back to 1998.

The problem with this decision is that employees are likely now to issue claims as quickly as they can, to make sure that they do not lose their rights in respect of recent holiday pay payments.

It is also very likely that this element of the decision will be appealed to the Court of Appeal.

Business Secretary Vince Cable has announced that the Government will review the judgment in detail as a matter of urgency, adding: "To properly understand the financial exposure employers face, we have set up a task force of representatives from government and business to discuss how we can limit the impact on business."

There are further holiday pay appeals in the pipeline, including (in relating to commission payments) whether employers are obliged to compensate employees who, because they are on leave, are not working to bring in the sales which will generate commission payments later on in the year.

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