LEGAL CORNER: Holiday pay calculation should also include overtime

28th Nov 2014

The Employment Appeal Tribunal has just handed down an important decision on the calculation of holiday pay, Bear Scotland v Fulton and others (UKEAT S0047/13). Three different cases which each raised similar issues were heard together, and a number of important principles can be derived from them.

The right to paid holiday is provided for in the European Working Time Directive, which was implemented in this country via the Working Time Regulations 1998. Until recently, the method of calculating holiday pay relied upon the pay that a worker would have received for their normal working hours on that day (e.g. a proportion of their annual salary, or their hourly rate multiplied by their usual hours on that day). Previous decided cases had also made clear that where an employee was entitled to additional payments, such as shift allowances or location allowances for example, these should also be included in the holiday pay calculation. This was to ensure, as the European Court put it, that the purpose of the Directive – which was to put the worker on leave in a comparable position to when he was at work – was met.

The key question in Bear Scotland was whether, when calculating holiday pay, the employer was also required to include non-guaranteed overtime payments in the calculation. The EAT decided that where, as in this case, an employee had an obligation to work overtime if asked, and where they regularly did work overtime, then that overtime pay must be included into the holiday pay calculation. The EAT stressed that non-guaranteed overtime would only be included where it became part of ‘normal remuneration’, and that an employer would have to consider the overtime worked over a period of time in order to assess what was ‘normal’.

The other important part of the decision focussed on the means of enforcing such a decision in practice. An employee usually needs to bring their claim for unlawful deductions from wages (which is how such a claim would be characterised) within three months of the last unlawful deduction. If the deductions have been on-going for some time, then so long as the claim has been made within three months of the last of these then the employee can claim back their past losses. The EAT confirmed that where an employee brought a claim relating to overtime payments, they could only do so within three months of the last of the lower payments and could only claim as far back as the payments had not regularly been made when they were entitled to them. If there was a gap of more than three months when either payments had been made or payments were not due, then this would break the series, and previous periods of time could not be relied upon and claimed for.

Additionally, it was clarified that this issue was relevant only for the purposes of calculating the four weeks holiday pay that a worker is entitled to under the European Directive, but does not apply to the additional 1.6 weeks paid holiday that workers are entitled to by virtue of UK legislation.

The decision clearly has wide ramifications both for employers and employees. Employers who offer overtime will need to assess how they calculate holiday pay, and it may be that calculations will vary from person to person and even, to the same person, over a period of time. This is, however, by no means the end of the story. Permission has been granted to appeal to the Court of Appeal, and it remains to be seen whether they take a similar or different view in due course.

Meanwhile, on the same day as the judgment was released, the Business Secretary, Vince Cable, announced that he was setting up a task force to assess the possible impact of the decision. Although the press release used neutral wording, the tweet from the Department of Business Innovation and Skills press office read ‘@Vincecable announces Govt/business Taskforce to look into limiting impact of #holiday pay decision’ [sic]. No prizes for guessing what the outcome will be!

Safia Tharoo, Barrister, 42, Bedford Row, London

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