Holiday Pay

The case of Bear Scotland Ltd and others v Fulton and others resulted in a finding by the EAT on 4 November 2014 that holiday pay must be calculated so as to include non-guaranteed overtime. Non-guaranteed overtime means overtime that employers are not obliged to offer but a worker has to work if it is offered. There will be considered to be a break in the chain of any "series of deductions" where a period of more than three months has elapsed between the deductions. Also, such calculation only applies to the 20 days' statutory holiday required by the Working Time Regulations and not the additional 8 days' additional holiday or any additional contractual holiday although there are obvious administrative issues for an employer if it seeks to make this distinction.

Although the identification of such break in the chain of any deductions severely limits the scope to make substantial retrospective claims for underpaid holiday, it does not completely rule them out.

Government Response

On 18 December 2014 draft regulations were laid before Parliament in an attempt to take action to protect businesses from the potentially damaging impact of large backdated claims. The proposed changes made to regulations under the Employment Rights Act 1996 will mean that claims to Employment Tribunals on this issue cannot stretch back further than 2 years.

Workers can still make claims under the existing arrangements for the next 6 months which will act as a transition period before the new rules come into force. The changes apply to claims made on or after 1 July 2015.

It appears that the two-year limit will apply to holiday pay and deductions from wages claims.

Next Steps

Previous European cases had already made clear that regular payments which are "intrinsically linked" to work carried out must form part of holiday pay (eg allowances paid to pilots for time spent flying, and monthly commissions received by sales people).

The ruling of Bear Scotland has, however, left a number of unanswered questions, which make it difficult for employers to assess whether or not they are affected and what action to take now.

Those employers who operate a settled pattern of work and who regularly require workers to work overtime may want to take steps now to include this element in the calculation of future holiday pay, and also to look back over the last 3 months' holidays and pay a supplement if there have been any underpayments of holiday pay in that period. Where there is irregular ad hoc voluntary overtime, arguably such amounts are not required to be included in the calculation. The cautious and administratively simpler approach will be to treat all leave the same, whether it forms part of the first 20 days, the extra 8 days or any additional contractual holiday, but that will have cost implications.

Also, it is unclear what the correct reference period is in order to achieve a representative average of the overtime payments to be calculated. It has been suggested that a 12 month period will be appropriate.

Posted on: 06/01/2015

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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