On 4 November 2014 the Employment Appeal Tribunal (EAT) ruled in the case of Bear Scotland v Fulton (and conjoined cases) that certain overtime should be included in the calculation of holiday pay, in addition to basic pay.
The decision will significantly increase the wage bill for many employers in the future and could lead to claims for backdated holiday pay where the calculation has been based solely upon basic pay.
How did we get here?
Under the Working Time Regulations 1998 (UK legislation) employees are entitled to 5.6 weeks’ paid annual leave per annum (28 days). The amount of holiday pay is calculated as follows, either:
a. the ‘normal rate of pay’, if the employee’s hours or pay for work done does not vary; or
b. the average remuneration over the previous 12 weeks if the employees’ hours of work vary.
Most UK employers consider ‘normal rate of pay’ to calculate holiday pay as basic pay only and do not consider overtime, commission-based payments and other extras in the calculation.
The Working Time Directive (EU legislation) provides that full-time employees are entitled to 4 weeks paid annual leave per annum (20 days); however the directive does not define how holiday pay should be calculated.
Recent rulings in the European Court of Justice (ECJ) have concluded that employees are entitled to “normal remuneration” when taking holiday, so regular extra payments such as overtime, allowances and commission need to be considered.
This EAT case is now testing the domestic application of the EU rulings.
What was the key points of the EAT ruling?
- Workers are entitled to be paid a sum of money to reflect normal ‘non-guaranteed’ overtime (i.e. overtime which the employer does not have to offer but the employee must work if offered) as part of their annual leave payments.
- This applies only to the basic 4 weeks’ leave granted under the Working Time Directive not the additional 1.6 weeks under the Working Time Regulations.
- Claims for arrears of holiday pay will be out of time if there has been a break of more than 3 months between successive underpayments.
What is the Impact for Employers?
The financial implications of this decision for employers are significant for future holiday pay, given the government estimates that one sixth of the UK workforce is paid some form of overtime.
Employers may, however, still be able to argue that overtime which is genuinely voluntary should not be included in holiday pay, which will provide some protection.
The prospect of significant claims for backdated holiday pay where overtime has not been included in the calculation historically appears to be limited given the 3 month break rule.
Howard Beckett, Unite director for legal commented “Until this judgment there was a chance that workers would not receive their normal pay during periods of rest, and it puts that right going forward”.
The Confederation of British Industry (CBI) disagreed saying businesses were now facing costs “potentially running into billions of pounds”, and warning that many would not survive.
CBI director-general John Cridland said;” This judgment must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”
The Government intends to review the EAT’s decision. Vice Cable commented “To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business”.
What action should employers take now?
- Employers should be acting now to look at how they structure working arrangements in order to minimise the increased liability for holiday pay. Options might include offering voluntary overtime instead of non-guaranteed overtime, using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime, and revising commission plans.
- Businesses should decide whether they are going to include overtime in the first four weeks of holiday pay only, in the 5.6 weeks’ holiday pay or the full contractual holiday pay entitlement (if greater).
- Businesses need to consider whether they need to budget in the current financial year for any valid claims their employees may have for backdated pay.