Earlier this week, the Employment Appeal Tribunal (EAT) held that the UK incorrectly interpreted European employment law by only taking into account basic salary in calculating an individual’s statutory holiday entitlement. Under the ruling, the individual’s “normal” remuneration should have been used as the basis for the calculation.

What constitutes “normal” remuneration? – Well basic pay plus any variable pay including “non-guaranteed” overtime – overtime that the employee is required to work but which the employer is not obliged to provide.  Providing this “non- guaranteed” overtime is normally worked, then it should form part of the holiday pay calculation.  Similarly, commissions and travel allowances (taxable payments for time spent travelling to work) if provided, should also be included.  The premise is to ensure that the worker is not financially worse off in terms of remuneration as a consequence of being on leave.

According to statistics around 5 million UK workers will be affected by the ruling, giving a major headache to a number of employers who were only just benefitting from the slight UK economic revival. The sectors considered high risk include retail, manufacturing and construction.

Office workers who regularly work beyond their contracted hours but do not get paid overtime are not affected.

The ruling only extends to the treatment of holiday pay payable under the Working Time Directive which equates to four weeks. The additional 1.6 weeks holiday, which workers are entitled to under the Working Time Regulations, is not included nor are contractual holidays in excess of the UK minimum. This offers a degree of relief to the employer, although, the administrative burden of monitoring this may prove to be challenging.

The only advantage for employers is that the ruling also clarified the position in relation to back dated claims. Initial fears of claims going back to as far as 1998 were dispelled when the EAT ruled that backdated claims cannot be made if more than three months has elapsed from the date the leave was taken.

Although, the above is good news to the workers who were disadvantaged in the past, the overall cost to employers cannot be underestimated. Some may reduce salaries, take on less staff,  – all negative actions that will potentially stifle growth in an economic climate that was showing signs of recovery.

There is still a high degree of uncertainty and it is no surprise that the ruling is being appealed to the Court of Appeal, although any decision is not expected until Spring 2015! The advice to employers is simple – keep monitoring the situation and watch this space!