On 4 November 2014 the Employment Appeal Tribunal (EAT) handed down its decision in the landmark case of Bear Scotland Limited v Fulton in which it confirmed that holiday pay should include a sum of money in respect of overtime.
Factoring non-guaranteed overtime into holiday pay calculations
Whilst it is well established that holiday pay should take into account guaranteed overtime, the decision has confirmed that non-guaranteed overtime (i.e. overtime which, if offered by the employer, the employee has a contractual obligation to perform, but which the employer has no obligation to provide) should also be factored into the holiday pay calculation.
Review existing holiday pay arrangements now
The decision on overtime is subject to appeal and is likely to be challenged in due course, however given the extensive media coverage on the issue, employers should at the very least review their existing arrangements and prepare themselves for any employee requests they receive in the meantime. The decision follows another key case, Lock v British Gas, in which it was determined that employers should take commission into account when calculating the level of holiday pay a worker should receive. However clarification of how this will work is still awaited and is not expected until February 2015.
What is ‘normal pay’?
Both cases are based on the notion that employees should not be deterred from taking their annual leave entitlement for fear of receiving less income than their ‘normal pay’, i.e. ‘that which is normally received’. In determining normal pay, employers will have to calculate holiday pay based on average earnings using an appropriate reference period. Unfortunately, the EAT has not provided specific guidance on what will constitute an appropriate reference period though it seems likely many employers will calculate an average based on earnings in the previous 12 weeks.
Applying holiday pay to statutory leave and/or additional leave
The current ruling only applies to statutory annual leave (the 4 weeks provided under European law) not the additional leave (the 1.6 weeks provided by UK law) but employers can apply the ruling to all holiday entitlement if they wish. In practice, it may actually be simpler to apply the calculation to all holiday pay rather than trying to administer separate payments for the different types of holiday.
Back-dated claims for under-payment of holiday pay
Although there has been much publicity about the potential impact that the ruling will have on businesses, the position for employers is not as bad as many had anticipated. Whereas previously it has been feared that the decision could give rise to back-dated claims stretching back as far as 1998 (when the Working Time Regulations came into force), it has been determined that where there is a series of underpayments (e.g. where an employee has taken holiday in various months of the year), a gap of more than 3 months will extinguish any earlier claims. Therefore, although it is technically possible for claims to date back some time (and could still potentially go back as far as 1998 if there are successive underpayments separated by gaps of less than 3 months), the likelihood of going back this far is somewhat reduced. In light of the strict time limits, employers may find that employees begin submitting requests and may even lodge claims to prevent their claim becoming time-barred.
Take legal advice on holiday pay before making decisions
Employers should be mindful of the fact that the legal position could change on appeal and should be careful not to rush into any decisions which could have repercussions at a later date. Any employers who are likely to be affected by the judgment should seek legal advice on their options before deciding what course of action they wish to take at this stage. The Employment Law department at Tallents can advise you on the most suitable course of action to take, just contact us today.