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Hello and welcome to the latest in our series of employment videos.

For today’s video we have a guest contributor, Lucy Bone, from Littleton chambers. Lucy is a leading employment barrister whose area of expertise covers a wide range of work-related disputes, including all forms of statutory and contractual complaints.

One of the difficulties facing employers is the question of what payments they should include in holiday pay. The issue has recently been of particular interest because of the decision of the Employment Appeal Tribunal in three conjoined cases including Bear Scotland Ltd v Fulton and others, which we shall refer to as the Bear Scotland case.

In today’s video Lucy and I will be discussing the topic of holiday pay and, in particular, the implications for employers of the Bear Scotland case.

Welcome Lucy and thank you very much for coming in.

Paul Griffin: Could we start off by explaining the legal entitlement to holiday pay in the UK?

Lucy Bone: From 1998 Europe introduced the Working Time Directive which provides that there must be a minimum of four weeks of annual leave. The way that the UK has incorporated that into domestic legislation through the Working Time Regulations is that it’s an additional period of leave so there is a 5.6 week allowance in total for workers and employees. It’s right to note that the European Court of Justice has always given a strong purposive interpretation to the right to annual leave and has emphasised the importance of the worker actually taking the holiday entitlement rather than simply being paid for it and that’s why in the Working Time Regulations there is provision which prevents payment in relation to untaken leave from being carried over from one year to the next and why its only on termination of employment, if there is untaken accrued holiday, that that can be provided for as a payment.

Paul Griffin: Prior to the decision in Bear Scotland, Lucy, what did it mean for calculating holiday payments for employers? What was included?

Lucy Bone: Employers have to pay normal pay for periods of holiday pay and that’s calculated according to the Employment Rights Act. For workers who have fixed hours - so a worker doing 9 to 5 and being paid a salary - the calculation was fairly straightforward. For those that don’t have fixed hours the Employment Rights Act provides for a 12 week reference period according to which the average is calculated and then holiday pay is paid in accordance with that. The Employment Rights Act also stipulates that in calculating that average you exclude overtime payments.

Paul Griffin: Since this decision in Bear Scotland what are we looking at in terms of additional payments that will now need to be made?

Lucy Bone: The Employment Appeal Tribunal looked afresh at what is meant by normal pay and looked at it in the context not of UK domestic law in the Employment Rights Act but in the context of the Working Time Directive and the right to be paid for holiday. In particular the European courts have always emphasised that a worker shouldn’t be disadvantaged in any way by taking that holiday. Normal pay, the Employment Appeal Tribunal held, is the pay that a worker normally receives and to pay less than that during periods of holiday could mean that a worker is disadvantaged or discouraged from taking that holiday. Now of course the pay that a worker receives isn’t necessarily tied to the hours that they work so a number of different types of payment now fall to be included when calculating holiday pay - so if a worker gets a shift premium or a radius allowance or even a travel time allowance, that may also have to be included in the calculation of holiday pay.

Paul Griffin: I think they have said generally overtime as a sort of overarching description will need to be included but does it include all overtime? Are we talking voluntary overtime as well, the type that an employee doesn’t have to actually work?

Lucy Bone: This, you are right, is the significance of the Bear Fulton decision that in particular overtime was focused on as something that would now need to be included. The issue in Bear Fulton related to non-guaranteed overtime but it is very likely that voluntary overtime will also need to be included in the calculation of holiday pay because it can’t really be said if a worker is regularly doing voluntary overtime that that’s not part of their normal pattern of work and so part of their normal pay.

Paul Griffin: And what about bonus payments? There has been some speculation that they may also have to be included in the calculation of holiday pay.

Lucy Bone: The key issue is whether there is a link between the work that the worker does and the payment that is being said should be included in the calculation of holiday pay. So when you look at bonuses, the question to be asked is whether it links to the work that that person actually does and that means that certain types of bonus, for example, workers who get a £200 Christmas bonus, that sort of thing, are unlikely to be included. However where the bonus reflects performance and reflects the work that the employee or worker has actually undertaken, then it is very likely that will have to be included. The analysis is slightly more nuanced where there is a group bonus. So for a trading desk there may be quite a careful analysis to be undertaken looking at the terms of the contract, how the bonus pot is divided out typically between those who are on the desk and other surrounding circumstances to decide really whether that critical link between the employee’s work and the payment claimed is made out.

Paul Griffin: Are we talking about all periods of statutory leave here or only those emanating essentially from Europe?

Lucy Bone: This is one of the very thorny issues coming out of Bear Fulton. Because the right to be paid this kind of holiday pay arises from the Working Time Directive it only applies to the four weeks of European holiday, if you like, and not to the 1.6 weeks that the UK provides as of domestic right. It is very complex to see how this is going to be translated into practice and the decision in Bear Fulton doesn’t really grapple with this but leaves it as one of the live issues that will doubtless be litigated in future. The anticipation at the moment is that the first four weeks of a workers holiday actually taken will be assumed to be the European weeks and so the weeks that attract higher payments because they include more types of payments within the calculation of holiday pay - but that’s still undecided.

Paul Griffin: Lastly Lucy, we have got this issue about backdating and I think that the court commented on this and there is a question mark about how far a worker could actually claim back in relation to holiday payments that hadn’t been made in the past.

Lucy Bone: This is an extremely important part of the Bear Scotland decision. Because the right to this increased holiday pay arises from the Working Time Directive, there was a concern that workers would be able to claim right back to 1998. In order to make this type of claim you have to make it as an unlawful deduction and there is a three month time limit for those sorts of claims. However where there is a series of deductions it may be that claims going back in time can be recovered. In Bear Scotland the Employment Appeal Tribunal looked very closely at this and said that where there was a three month break in that series, so any series of holiday payments that had been broken by a three month period, that would stop the employee being able to go further back in time and claim. This has led to great relief for many employers but I think actually the position may be more tricky and more risky than has been anticipated because of course many workers and employees may not have a three month break, particularly when you factor in the 1.6 weeks of UK leave. For any employee or worker who is required to take statutory holidays as and when they fall in the calendar year, depending on when Easter falls, the only reliable three month period in the calendar which is unbroken by statutory holidays is in the Autumn. Now all you need to do is to be a worker who takes your holidays outside of the school holidays or to be a parent who would like to have a day or two off at half term and suddenly there isn’t any period through the working year where there is a three month break.

Thank you Lucy. That was very clear and thanks for coming in.

We shall of course keep you informed of further developments in this area but in the meantime if you have any questions in relation to today’s video, please contact us.

Thank you.