Newsflash: Big news – holiday pay and overtime

What do we already know?

We updated you in our June Newsletter Case update (1): Holiday pay – working time and commission on the ECJ decision in Lock v British Gas that commission payments need to be taken into account when calculating holiday pay and we produced guidance on this available here.

The Lock decision opened up many questions about the way the Working Time Regulations 1998 approach the calculation of holiday pay. A number of workers had already brought Tribunal cases seeking to challenge their employers’ calculation of holiday pay and seeking to include elements such as commission, overtime pay, attendance bonuses and travel allowances.

What’s new?

Three of the above Tribunal cases were appealed, combined and heard by the EAT in July in the case of Bear Scotland Ltd and others v Fulton and others. They all concerned the question of whether non-guaranteed overtime should be included in holiday pay.

The EAT has now published its decision which is that holiday pay should be calculated to include non-guaranteed overtime. The decision is available here.

Implications?

The above decision means that:

• From now on, holiday pay should be calculated to include non-guaranteed overtime and similar payments, at least for the basic entitlement of 4 weeks’ leave per annum required by the EU’s Working Time Directive.

• The additional statutory entitlement to a further 1.6 weeks’ leave provided by the UK’s Working Time Regulations is not covered by this decision and so in theory an employer would be entitled (as the law now stands) to continue calculate this additional holiday on the basis of basic pay only. However, we appreciate that such an approach might well provide an administrative headache.

• Likewise, any additional holiday entitlement that you may provide to your workforce above and beyond the statutory entitlement of 5.6 weeks, can still (as the law now stands) be calculated on basic rate pay, subject again to the question of whether an employer would want to operate such a complex holiday pay calculation.

Importantly, the EAT also decided that claims in respect of back pay (relating to previous holidays taken) will not be possible if there has been a gap of 3 months or more between payments in which there has been a holiday pay shortfall. This may well limit workers’ claims for back pay, since we expect that most claims are unlikely to go back further than the current holiday year. All holiday back pay claims will now be scrutinised for the presence of any 3-month gap between holiday payments, which will ‘break the chain’ in terms of how far back the holiday claim can go.

It does add to the administrative headache, though, as employers will have to trawl through records to establish the three month gap in each case. Further, the case is being appealed and this is the most controversial aspect of the decision and will be undoubtedly strongly challenged in the Court of Appeal.

Employers’ understandable deep concern about the prospect of long-serving employees claiming holiday-related back pay as far back as 1998 seem very unlikely to be realised, except for the rare case where an employee can prove that s/he never had a period of 3 months or more in between each holiday payment that is being challenged as having a shortfall in it.

This is an important decision with potentially expensive consequences for employers and we shall explore this decision in the detail it deserves in our November Newsletter, so watch this space.

We will also be putting on another seminar early in the new year on the subject of annual leave & holiday pay. In the seminar we’ll explore the potential impact for your organisation in more detail and help you to identify your likely exposure. As well as looking at the practical steps you can take to assess cost, we’ll provide you with the essential tools to plan your approach and manage your risk. As always, the session will be highly practical, equipping you with the knowledge, confidence and key templates you’ll need to deal with the range of holiday pay issues now at large.