The long awaited judgement in the cases of Bear Scotland & ors v Fulton & ors (and conjoined cases) has been issued by the EAT. These cases deal with the issue of what payments should be included when calculating holiday pay; specifically whether or not regular paid overtime should be included.
As widely anticipated, the EAT has found in favour of the employees on this point, holding that holiday pay should include payment in respect of all elements of a worker's normal remuneration, and this includes payments in respect of non-guaranteed overtime.
The case follows on from the recent European Court of Justice decision in Lock v British Gas, which found that regular commission payments should also be included when calculating holiday pay.
Who will be affected?
This judgement is likely to affect employers who have staff;
- earning regular commission
- working regular paid overtime
- in receipt of regular allowances e.g. night shift, attendance
- whose actual hours of work are in excess of the basic hours stated in their contract
Does the judgement affect all holidays?
No, the judgement applies only to the four week holiday entitlement granted to workers under the Working Time Directive (WTD), and not the additional 1.6 weeks granted by the UK under the Working Time Regulations. For some employers, this may mean treating payment for the first four weeks of annual leave in a different way from later holiday payments.
Will employers have to pay backdated holiday entitlement?
The other main issue determined by the EAT was the scope for backdated holiday pay claims. In general, claims have to be raised at a tribunal within three months of the underpayment. What was in dispute was whether or not claims could be raised within three months of the most recent deduction i.e. linking all previous deductions, or whether each underpayment could be viewed separately. Here, the EAT somewhat unexpectedly ruled that if there is a gap of more than three months between any two underpayments of qualifying holiday, the 'link' will be broken with the result that previous claims will be time barred. The EAT suggested that the first four weeks' annual leave taken by a worker in a holiday year will be viewed as their entitlement under the WTD, so it is likely that in many cases more than three months will elapse between the first four weeks' leave in each holiday year. As it stands, this is likely to significantly curtail a worker's right to claim backdated holiday entitlement.
What should employers do now?
Firstly, note that leave has been given by the EAT for the case to be appealed to the Court of Appeal, so it is entirely possible that there will be further developments in these cases and the legal position could change, in particular in relation to the issue of payment for backdated holiday entitlement.
In the meantime, employers should consider if they have workers likely to be affected by this judgement. Not all workers who carry out paid overtime will be affected; only those who are required to work regular overtime and where it can be seen as part of 'normal remuneration'. In many cases, this will be a question of judgement.
If there are affected workers, the employer will have to decide how best to address the matter; whether to await the outcome of any appeal or changes their holiday practices now. Given the judgement in relation to the backdating of holiday pay, we would advise that employers give consideration to introducing changes to their holiday pay calculations now on the basis that, after three months, any historic claims will potentially be time barred.
Any claims from employees for backdated holiday entitlement, at least in respect of previous holiday pay, should be resisted, particularly if there is a gap of more than three months between 'qualifying' holidays.
Consideration should also be given to limiting the frequency and/or regularity of overtime to minimise the prospect of such payments forming part of an employee's normal remuneration.
Unfortunately, the issue of holiday pay is unlikely to go away soon. Clients of LAW who have any questions in relation to this complex area should contact their legal manager to discuss the position and the options open to them.