After what has been a tense wait for employers in the U.K., the U.K. Employment Appeals Tribunal (EAT) has recently issued its much anticipated landmark judgment in Bear Scotland Ltd -v- Fulton & anor, the financial implications of which are far reaching and of vital importance to U.K. employers.

This case concerned the question of whether employers should take payments of non-guaranteed overtime into account when calculating statutory holiday pay. It has already been established that guaranteed overtime should be included within the calculation of statutory holiday pay.

Key Findings

The EAT held that non-guaranteed overtime (i.e., where an employer is not obliged to offer overtime but an employee is obliged to work overtime work if required to do so) should be taken into account when calculating holiday pay in relation to the four- week holiday entitlement derived from the European Working Time Directive (but not the additional 1.6 weeks under the U.K.’s Working Time Regulations). Following this decision, all employers who pay guaranteed and/or non-guaranteed overtime (and possibly any other regular payments intrinsically linked to workers’ contractual duties) face an increased financial burden by having to factor in such payments when calculating statutory holiday pay. Such employers may also have potentially significant liabilities for historic underpayments of statutory holiday pay.

This follows the related case of Lock -v- British Gas Trading Limited and Others in which, earlier this year, the Court of Justice of the European Union held that commission should be included in holiday pay where it is part of a worker’s “normal remuneration”. This case will return to the U.K. Employment Tribunal early next year for final determination of this issue.

The second key decision of the EAT in the Bear Scotland Ltd -v- Fulton & anor case will, however, bring some welcome relief to U.K. employers. It was held that unlawful deduction from wages claims by workers for underpayments of statutory holiday pay will be out of time if there has been a break of more than three months between successive underpayments. This may significantly limit the extent to which workers can claim for historic underpayments of holiday pay as any claim by a worker will be out of time in respect of underpayments which occurred before that three-month break.

The U.K. Business Secretary Vince Cable announced that he is setting up a task force to assess the possible impact of this ruling – a sign of how concerned the business community in the U.K. is about the implications of the case.

Practical Implications

Employers affected by this decision will need to make a choice: either to adopt a “wait and see” approach or to start calculating (and paying) statutory holiday pay so as to include overtime and, if relevant, commission and other regular payments intrinsically linked to a worker’s contractual duties.

The “wait and see” approach will involve an employer waiting to see how the business community reacts to this decision and what recommendations are made by the U.K. Government’s task force. It may also involve the employer waiting to see whether any of the key decisions in this case are appealed to the U.K. Court of Appeal and, ultimately, to the U.K. Supreme Court. However, any appeal process may take years and the general consensus is that any appeal on the key issue (of whether one has to take overtime into account when calculating statutory holiday pay) is unlikely to succeed.

The other approach will involve an employer making a decision to take into account overtime (and, if it does not do so already, commission and other relevant payments) in the calculation of statutory holiday pay and start to pay statutory holiday pay on this basis, so as to set the three-month time limit running for the purposes of any potential claims by workers. (As mentioned, such claims will be out of time if there has been a break of more than three months between successive underpayments, although this point itself may well be appealed).

In any event, the first step for employers affected by this decision will be (if they have not done so already) to attempt to calculate their potential historic and ongoing liabilities for underpaid statutory holiday pay.

Outstanding Issues

Although the judgment in Bear Scotland Ltd -v- Fulton & anor answered certain questions, some key points remain in need of clarification.

  1. How far does the potential historic liability stretch back?

As a gap of more than three months in any alleged series of underpayments will render a claim (for unlawful deduction from wages) out of time, U.K. employers face the administratively difficult task of trying to calculate their historic liability. This exercise is made more difficult as it is still unclear whether such claims will stretch back six years (under the normal contractual six-year limitation period) or whether they will stretch back to 1998 (when the Working Time Regulations came into force).

  1. How do employers calculate their historic liability?

The decision in this case entitles workers to have overtime factored into the calculation of their pay for their four-week period of statutory holiday derived from the European Working Time Directive (and not in respect of the additional 1.6 weeks of statutory holiday under the U.K.’s Working Time Regulations). Therefore, employers will need to consider which holiday has been allocated as “additional” holiday, as this will impact whether there has been a three-month break between successive underpayments. In any event, whatever system is used to decide this may well be challenged in the courts in future.

  1. How do employers calculate holiday pay going forward?

Under the Working Time Regulations, a 12-week reference period is used to calculate holiday pay where a worker has no normal hours of work. It is not yet clear whether this same 12-week reference period should be used to calculate statutory holiday pay or whether some other period should be used. If the 12-week reference period is used in the calculation of holiday pay and the amount of overtime varies greatly depending on the time of the year, this may result in wildly varying levels of holiday pay.

  1. Should voluntary overtime be included in the calculation of holiday pay?

It is still unclear whether overtime which is deemed to be purely voluntary (i.e., the employer is under no obligation to offer overtime and the employee is under no obligation to accept overtime, if offered) should be included in the calculation of statutory holiday pay.