Landmark Holiday Pay ruling

holiday payThe EAT (Employment Appeal Tribunal) has handed down it’s judgment in the Bear Scotland v Fulton (and others) ruling that payments for overtime should be included in the calculation of for holiday pay and leave taken under regulation 13 of the Working Time Regulations 1998.

At HR Service Centre we think that this is of major significance for employers and employees alike.

The Key Points of the Holiday Pay ruling

  • Workers will be entitled to be paid a sum of money to reflect ‘normal pay’ rather than basic salary, which will include non-guaranteed but regular overtime, as part of their annual leave payments.
  • This will apply only to the basic 4 weeks’ leave granted under the Working time Directive, not the additional 1.6 weeks under regulation 13A of the working Time Regulations or any additional contractual holiday pay over and above this amount.
  • Claims for arrears of holiday pay will be out of time if there has been a break of more than three months between payments for holiday.  This means that it is likely the ruling would only apply to claims relating to the most recent leave year.
  • Other allowances and earnings such as travel time payments which exceed expenses incurred, and commission payments which amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

There is much speculation about whether the ruling can be applied retrospectively, which could result in large claims for back pay over long periods of time. However the judgement says that it was not open to employees to claim that they had suffered a series of deductions (for the purposes of the unlawful deductions from wages provisions of the ERA 1996) by linking each occasion on which a period of holiday was underpaid. Where a period of more than three months had elapsed between each deduction, this has the effect of breaking the series.

As a basic principal, a worker should be paid holiday pay at the same rate as his or her “normal pay”.  Normal pay includes all elements of pay that are directly linked to the work the worker is required to carry out.  Essentially, a worker should not be paid less than he or she usually would just because they take holiday.  That means calculating holiday pay by reference to a “week’s pay” as set out in the Employment Rights Act 1996 (ERA).

By way of overview, where a worker’s pay fluctuates, a week’s pay (and thus a week’s holiday pay) is the average amount the worker earned in the 12 weeks immediately before the holiday is taken.  It is, however, not clear whether the statutory process allows for sums which are not “normally” incurred to be omitted from that calculation.

What elements need to be included?

Where there is a settled pattern of work, and a correspondingly regular overtime payment, that overtime payment will be “normal”.  It should therefore be included in the worker’s holiday pay.  However, where payments are not so settled or regular, there might be greater scope for an employer to push back on their inclusion in holiday pay.

Perhaps a pragmatic way to look at the issue is this: will the employee feel as though he or she is losing pay by taking holiday?  If so, because he or she would usually receive more than just basic salary, then that overtime or allowance should probably be included in his or her holiday pay.  If not, because the worker doesn’t often get overtime or allowances, then it is more likely that those sums won’t count as “normal pay” and do not therefore need to be factored into holiday pay.

In response to the ruling the Government has announced that it is setting up a task force to assess the impact and to provide guidance to employers on the practicalities of dealing with the judgement.

Leave to appeal to the Court of Appeal has also been granted, which means it may be some time before there is any legal certainty on the issue.  It may also mean that Employment Tribunal hold any existing claims for backdated holiday pay until all appeal avenues have been exhausted.

If you think you might be affected by the judgement, the immediate advice is to let the dust settle for a short while to see how the judgement is more generally interpreted and to see how Government decides to react to it.  However, it is worth planning ahead to identify those workers who regularly work overtime or receive other allowances, and to ensure your records and systems can adequately track holiday accurately.

As soon as we know more, we will issue further guidance and advice on how to deal with this issue.

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