How should an employer compute a week's pay in relation to an employee's holiday pay entitlement?

The rules for calculating a week's pay for the purposes of holiday pay are set out in ss.221 to 224 of the Employment Rights Act 1996. For salaried employees whose pay does not vary, a week's pay is the amount due under their contract. For workers whose pay varies, a week's pay is based on their average weekly earnings. The average is taken over the 52-week period ending with the week immediately preceding the date on which their holiday begins, discounting any weeks in which no pay was received.

However, these rules have been modified by a series of cases deciding which elements of pay should be included when calculating normal remuneration for the purposes of holiday pay under the Working Time Directive.

In Williams and others v British Airways plc [2011] IRLR 948 ECJ, the European Court of Justice (ECJ) held that any aspect of pay that is intrinsically linked to the performance of the tasks that the worker is required to carry out should be included in the calculation of the worker's total remuneration. This meant, in that case, that an allowance for the time spent flying should be taken into account when calculating pilots' holiday pay.

In Lock v British Gas Trading Ltd [2014] IRLR 648 ECJ, the ECJ held that holiday pay should include a payment representing the notional commission that the worker would have earned had they not taken leave. On the return of the case from the ECJ to the employment tribunal, the tribunal concluded that words could be read into the Working Time Regulations 1998 (SI 1998/1833) to comply with the ECJ's interpretation of the Working Time Directive, with the effect that commission is included in the calculation of normal remuneration (Lock v British Gas Trading Ltd and another [2015] IRLR 438 ET). The tribunal's decision has since been approved by the Employment Appeal Tribunal (EAT) and the Court of Appeal.

Following the EAT's decision in Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others [2015] IRLR 15 EAT, a week's pay must include regular overtime that employees are required to work, even if the employer is not contractually obliged to offer a minimum number of overtime hours. In East of England Ambulance Service NHS Trust v Flowers and others [2019] IRLR 798 CA, the Court of Appeal confirmed that this also applies to voluntary overtime where this is part of a pattern of work that is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration.

These cases apply only to the four weeks' annual leave that employees are entitled to under reg.13 of the Working Time Regulations 1998, because this derives from the Working Time Directive. For the additional 1.6 weeks' annual leave under reg.13A, a week's pay is the amount due under the contract, or the average over 12 weeks if the employee has irregular pay; it is not necessary to include elements such as commission or non-guaranteed overtime. However, to make the administration of holiday pay easier, employers may choose not to make a distinction between the different types of annual leave.