Overtime to count in holiday pay

In a very significant case, the Employment Appeal Tribunal in the case of Bear Scotland v Fulton (and others) has this week ruled that overtime should be included as part of workers’ annual leave payments.

The key points from the ruling are:

– A payment for both compulsory and non-guaranteed overtime should be included within a worker’s holiday pay where the overtime was part of the worker’s “normal” earnings.

– Although under UK law workers are entitled to 5.6 weeks’ holiday (28 days for someone who works a 5 day week), it appears these new rules would only apply to the 4 weeks’ (20 days’) leave to which workers are entitled under EU law (the Working Time Directive).

– Claims for under payments of holiday pay will generally be out of time if there has been a break of more than three months between successive underpayments.

– Any payments to workers for travel time which exceed the expenses actually incurred by the worker, should also be reflected when calculating holiday pay, as they amount to taxable remuneration.

– Permission has been granted to the employers involved in the case to appeal to the Court of Appeal.

We know many employers and employees will have a number of questions arising from this decision; however, the decision does not give the answer to many of them. Whilst the media is keen to highlight the potential consequences, a final decision on these issues may still be some time away, which leaves employers in a difficult position in the meantime.

Although there are still lots of grey areas following the ruling, we have prepared the following answers to some of the questions we have already been receiving from clients and contacts:

•  How long do employees have in which to bring a claim?

According to the judgment, employees must bring a claim for underpayment of holiday pay within three months of the underpayment. This means that employers may be let off the hook for a failure to pay overtime within holiday pay that happened over three months ago.

•  How far back could claims for underpayments go?

A worker may be able to claim for a series of underpayments of holiday pay. We do not know yet how far back the worker can go; however, we do know that the ‘chain’ of under payments can be broken by a three month gap in the series of under payments. Employers therefore, may only be liable for holiday pay up to the last break in deductions. This would usually be where the employee hasn’t taken any holiday for over three months.

Employers may however still be vulnerable in relation to a breach of contract claim. Employees would have to argue that the entitlement to holiday at the right rate was part of their contract of employment. If successful, their claim of underpaid holiday could go back 6 years (the limitation period for breach of contract claims). We do not know yet know whether such a claim would be successful, but this is highly likely to be challenged.

•  How should we calculate holiday pay going forward?

We don’t really know at this stage. The ruling states that overtime should be included within a worker’s holiday pay where it has become part of their ‘normal earnings.’ We don’t have any guidance yet as to how ‘normal workings’ should be calculated. It seems likely that it could be the worker’s average earnings over the last twelve weeks (the same period used to calculate a week’s pay for employees without normal working hours), or the worker’s average earnings over a period of 12 months. This will be for the Government to decide.

• What happens next?

The Government has reacted pretty swiftly to the decision, announcing a “taskforce” to assess the possible impact of the Employment Appeal Tribunal ruling on holiday pay. Significantly the taskforce will include seven business representative groups all of which are employer organisations. This coupled with a tweet from the BIS Press Office stating that the taskforce will “look into limiting impact of #holidaypay ruling” gives a strong indication of whose side the Government is on.

We will of course update you as soon as there are any further developments in this area.

If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]).

Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.