One of the current hot topics for employers relates to holiday pay. The general trend in recent case law has been to increase employees’ rights in relation to holiday pay – and thereby increase costs for employers. In particular, a recent ruling by the Employment Appeal Tribunal (EAT) has potentially significant consequences for employers whose employees work overtime.

It has long been the case that guaranteed overtime (which the employer is required to offer and the employee is required to work) must be taken into account when calculating holiday pay.  The position in relation to non-guaranteed overtime, which the employee must work if requested to do so by their employer, was considered recently by the EAT in the recent case of Bear Scotland.

The EAT concluded that employees have a right to receive their “normal remuneration” when using their statutory holiday entitlement; meaning the pay they would normally receive if they were working.  In line with recent European case law, this had to include any payment that was “linked intrinsically” to the work the employee was required to do.

The non-guaranteed overtime worked by the employees in the Bear Scotland case had been worked sufficiently regularly so as to form part of their normal pay and, as the overtime work was required by the employer, the EAT was satisfied that there was an intrinsic link to the employees’ work. As a result, non-guaranteed overtime had to be taken into account when calculating holiday pay.

The implications of the case for employers are significant, with the Director-General of the Institute of Directors warning of a “holiday pay timebomb”.  It is estimated that in the region of 5 million UK employees work overtime and the decision also has wider implications, including in relation to shift allowances, standby and call-out payments, and potentially other payments.  Another recent decision established the principle that holiday pay must also include an element to compensate employees in respect of commission they would have earned had they been at work, though the commission-related decision is currently being appealed. 

Case law in this area is still evolving, with some commentators suggesting that further challenges in relation to purely voluntary overtime may also be likely to succeed.  As a result, the potential liabilities for employers in respect of underpaid holiday pay could be substantial. 

Employers should now take steps to establish whether their workforce  payments) regularly or frequently and ensure that holiday pay includes appropriate elements to compensate employees for payments they would have received if they had been at work.  Employers may be able to take steps now to limit their historic liabilities, as well as their liabilities going forward.

Our employment team is offering a fixed-fee holiday pay audit to help clients determine whether they have any potential liabilities relating to underpaid holiday pay and to help develop a plan for dealing with holiday pay going forward.  If you are interested in this fixed-fee service, contact Lisa Robertson or Natasha Robson for details.