In a landmark case, the Employment Appeal Tribunal ruled, on Tuesday 4th November 2014, that it is wrong for employers to only take into account basic pay when calculating how much an employee should be paid while they are on holiday.

 But what does it mean for businesses that pay regular overtime?

  • As this was an Employment Appeal Tribunal (EAT) ruling on a number of cases, the judgement and therefore employer obligation comes into effect immediately without any further legislation required.  This means, that if you pay overtime regularly, you will need to address this now otherwise, your employees may have tribunal claims for unlawful deductions from wages.


  • All workers must be paid "normal remuneration" during the first 4 weeks of holiday they take (including bank holidays) i.e. their typical average pay rather than just their basic pay only.  This must include overtime payments including non-guaranteed overtime (work which an employee, if requested, is obliged to perform).  It does not however, include voluntary overtime where staff can refuse to work if asked.  


  • Employees can make retrospective claims but only if the under payment of holiday pay was less than 3 months ago – earlier holiday payments can form part of the claim only insofar as there is not a gap of more than 3 months between them. 


  • Vince Cable has announced he is setting up a taskforce to assess the possible impact of the decision and how the impact on business can be limited.  This task force is made up of very employer centric organisations (e.g. there are no trade unions) and so hopefully they will take a sympathetic view on businesses.  In addition, the organisations in the original tribunal case may appeal to the Court of Appeal which may mean that there is a short reprieve.     


  • If you currently make regular overtime payments or allowances, then you need to with immediate affect review and change how you calculate employee’s pay whilst they are on holiday (and when they leave) to reflect average pay (over the previous 12 weeks).  In addition, you will need to review your records for the past year and where there is not a 3 month gap between holidays, make retrospective top up payments.