Holiday Pay NightBEAR for Employers … BUT Silver Lining

The Employment Appeal Tribunal (EAT) has today issued its detailed decision in the hotly anticipated holiday pay/overtime cases (Bear Scotland Ltd v Fulton & anor).

The bad news

The crux of the decision is that holiday pay should reflect “normal remuneration” (i.e. pay which is normally received by a worker) and that this should include payments of non-guaranteed overtime.  The EAT also found that radius allowances and travelling time payments also fell within normal remuneration and thus should be reflected in holiday pay.

As a brief aside, there are two sources of holidays for a UK worker.  There is basic leave – that being the 4 weeks’ annual leave entitlement derived from the European Directive.  In addition to basic EU leave, UK law offers an additional 1.6 weeks’ annual leave.  Strictly speaking, the EAT decision requiring overtime to factored into holiday pay applies only to the 4 weeks’ basic leave (because the decision is concerned with annual leave stemming from the EU Directive).  In other words, employers can still potentially pay the 1.6 weeks’ additional leave at just basic pay excluding overtime.  Whether employers will go to the expense of creating separate holiday pay systems for the separate types of leave is another matter (the costs could outweigh the benefits).

The silver lining?

Employers would be well advised to amend their practices for holiday pay moving forward in order to comply with the decision.  Some employers might elect to reduce the availability of overtime to limit the impact of the decision.  However, the issue of backdated claims remains.  That is the million dollar question – can employees claim for backdated holiday pay and, if so, how far back can they go?

The EAT held that the scope for recovery of underpaid holidays as unlawful deductions from wages was limited.  The workers in these cases sought to go back a number of years, arguing that each underpaid holiday was one in a series of deductions.  It was decided that workers could not claim for any holidays in cases where a period of three months or more had elapsed between the underpaid holiday. In other words, any underpaid holidays which have been superseded by a gap of three months or more, without any further underpaid holidays, are extinguished for the purposes of any unlawful deduction claims.  That might prove to be a saving grace for many employers at least in terms of limiting liability.

Still unanswered questions

Leave has been granted for the unsuccessful employers to appeal this decision to the Court of Appeal.  Given the wide ranging ramifications of this decision, an appeal should be expected.

The judgment does not offer any insight into how employers should factor overtime into holiday pay in practical terms.  Presumably, employers can utilise average overtime payments over a particular reference period.  However this will likely result in further considerations as to what specific reference period should be utilised – particularly in industries where overtime is seasonal and thus subject to greater fluctuation.  For example, do employers look at a 12 week reference period or do they take an annual average?

One thing is a certainty – this will be far from the last word on the matter and the floodgates will likely open as employees and unions rush to get claims in before employers correct their practices.

Jack Boyle
Senior Solicitor – Employment Law

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