With the furore surrounding the recent holiday pay decision of the Employment Appeal Tribunal (EAT) in Bear Scotland Limited & Others v Fulton & Others, it would be easy to assume that HR and employment law professionals will be unable to take a holiday before 2016!

However, we believe the following 8 points should help make light work of what employers need to know about the current position on calculating holiday pay, and the next steps they should be considering.

1)  The UK position on calculating holiday pay

Under the Working Time Regulations 1998, which the UK passed to implement the EU’s Working Time Directive, employees are entitled to a week’s pay in respect of each week of leave. How that week’s pay is calculated depends upon whether the employee has normal working hours or not. A week’s pay for those with normal working hours is what they get paid for working their normal week. A week’s pay for those with no normal working hours is their average weekly pay calculated over a reference period of 12 weeks, to include overtime, bonus and commission.

However, under UK legislation where an employee is entitled to overtime pay when working for more than an agreed fixed number of hours in a week, the employee is treated as having normal working hours equivalent to the fixed hours agreed (and ignoring the overtime hours). The Court of Appeal applied this approach to normal working hours to the calculation of a week’s holiday pay, which has allowed employers to exclude overtime payments and other allowances from holiday pay.

2)  The European position on calculating holiday pay

In the years following the Court of Appeal’s decision, the European Court of Justice (ECJ) has developed principles for calculating holiday pay under the Working Time Directive (which does not specify how holiday pay should be calculated). These principles are:

  1. Employees should receive their “normal remuneration” during their holiday. This means payment during holiday should be comparable to payment during periods of work.
  2. Any work (i) intrinsically or directly linked to tasks which the employee is required to carry out and for which a monetary sum is provided; or (ii) relating to the employee’s personal or professional status; must be taken into account when calculating holiday pay.

The issue was whether the ECJ’s interpretation of the Working Time Directive could equally be applied to an interpretation of the UK’s Working Time Regulations.

The issue was whether the ECJ’s interpretation of the Working Time Directive could equally be applied to an interpretation of the UK’s Working Time Regulations.

3) What has the EAT in Bear Scotland Limited recently decided should be included in holiday pay?

Following the principles of the ECJ, the EAT decided to interpret the Working Time Regulations as requiring the inclusion of non-guaranteed overtime and certain other allowances, such as travel time payments, when calculating holiday pay. (Non-guaranteed overtime is overtime employers are not required to offer, but employees must work when offered.)

However, it was held that the requirement to include overtime pay and allowances only applies to the mandatory 20 days’ holiday required by the Working Time Directive, and not the additional 8 days’ of statutory holiday provided by the Working Time Regulations.

4)  What about commission payments?

Bear Scotland Limited did not make a determination on the inclusion of commission payments in holiday pay. Lock v British Gas, a case regarding the inclusion of commission payments in holiday pay was heard by the ECJ earlier this year and has been referred back to the UK. The UK case is scheduled to be heard in February 2015.

The decision of the ECJ clearly stated that commission should be taken into account when calculating “normal pay” for the purposes of holiday pay and a failure to do so would mean the employee is placed at a financial disadvantage when taking holiday. It remains to be seen whether the Tribunal will follow Bear Scotland in determining whether the ECJ’s decision can be interpreted within the confines of UK legislation.

5)  What about annual or discretionary bonuses?

It is unclear whether annual or discretionary bonuses count as “normal pay” for the purposes of calculating holiday pay. We believe it can be argued that these payments are not intrinsic to an employee fulfilling their duties and cannot be regarded as “normal” pay.

6)  What is the potential liability for under payment of holiday pay to include overtime?

There has been extensive commentary and concern regarding how far back any underpayment of holiday pay claims may extend on the basis that underpayments will be considered to be a “series of deductions” and that Tribunal limitation deadlines have not been missed.

The EAT have provided some comfort for employers, stating that any claim for unpaid holiday pay must be brought within 3 months of the most recent underpayment. As a result where an employee has a period of longer than 3 months between taking holidays (where it is assumed the 20 days’ holiday required under the Working Time Directive will be taken first), there will be a break in the series of underpayments, and prior deductions from holiday pay can not be claimed.

However, the issue as to how far back holiday pay claims can potentially go was not considered by the EAT. Theoretically, if an employee can establish there has been no break of more than 3 months between underpayments we are still uncertain whether the employee can make a claim going back 6 years or even to the introduction of the Working Time Regulations in 1998.

There is also no clear guidance on what the correct reference period should be when calculating a week’s holiday pay in these circumstances, for example whether a 12 week reference period should be used or something longer.

7) Will the Bear Scotland Limited decision be overturned?

Potentially. The EAT judge has given the parties leave to appeal all aspects of its decision to the Court of Appeal so there may be further twists and turns regarding the calculation of holiday pay and how far back any potential liability may reach. The UK government has also announced a task force to analyse the case and consider how to limit the impact on employers. This means we can not rule out the potential for new legislation, although it seems unlikely until after the General Election in May 2015.

8) What are employers doing now?

Many employers have decided to “wait out” the case law developments and government analysis before making any changes to the way in which holiday pay is calculated. It may be some time before there is a fixed UK legal position on whether overtime, commission and other allowances need to be included in holiday pay calculations, not to mention the political uncertainty in an election year.

However, it does appear that some change is inevitable and employers would be well advised to:-

  1. Analyse their own workforce in term of overtime / commission / allowance payments and calculate their potential liability of holiday pay underpayment;
  2. Consider how overtime, commission and other allowance payments are recorded and make changes to ensure it will be possible to calculate holiday pay accurately;
  3. Consider the use of bank or agency staff to cover any period of increased demand; and
  4. Ask for indemnities on any historical holiday pay liability when making a business or company purchase

If your potential holiday pay liability is such as to cause grave concern, it may also be worth considering making payments from now on to include overtime, commission and allowances to reduce the risk of extensive historical holiday pay claims.

Happy holidays!