After what has been a nail-biting wait for employers, the Employment Appeals Tribunal (“EAT”) yesterday issued its much anticipated landmark judgment in Bear Scotland Ltd -v- Fulton & anor. The decision has serious financial implications for many UK employers. This case concerned the question of whether employers should take into account payments of non-guaranteed overtime when calculating statutory holiday pay or whether statutory holiday pay should only include basic pay. It has already been established that guaranteed overtime should be included within the calculation of statutory holiday pay.

Key Findings

  1. It was held that non-guaranteed overtime should be taken into account when calculating holiday pay in relation to the statutory minimum four weeks holiday under the Working Time Directive (but not the additional 1.6 weeks under the Working Time Regulations). As a result of this decision, all employers who pay overtime face an increased financial burden by having to factor in overtime payments and potentially any other regular payments intrinsically linked to workers’ duties (that might include standby and call-out payments and other allowances), when calculating statutory holiday pay. This will also extend to historic underpayments of statutory holiday pay. (It has already been held by the European Court of Justice that commission should also be included in the calculation of statutory holiday pay where it is part of a worker’s ‘normal remuneration’ – a case that will return to the Employment Tribunal early next year for determination of the issue in the UK.)
  2. The second key decision in this case will be of some relief to employers.It was held that unlawful deduction from wages claims by workers for underpayment of statutory holiday pay will be out of time if there has been a break of more than three months between successive underpayments. This is because there is a three-month time limit for bringing such claims, starting from the date of the last unlawful deduction. This second key decision may significantly limit the extent to which workers can claim any historical underpayment of holiday.

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 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 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 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 Court of Appeal and, ultimately, to the 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 deductions, although this point itself may well be appealed.) However, such action may alert workers to their potential claims.

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 liability for underpaid statutory holiday pay. Going forwards, employers may also wish to consider reducing the availability of overtime, where that is practicable.