Summary

Typically most employers have calculated holiday pay on the basis of basic pay only. The question of whether this basis of calculation of holiday pay is correct has been the subject of judicial consideration in a number of recent cases. The 'holiday pay issue' has been described by the CBI as the 'the single biggest employment issue for businesses right now' that could cost businesses billions in back payments.

The EAT issued its Judgment in one chapter of this saga in the cases of Bear Scotland –v- Fulton and others (and other consolidated claims) this morning. The primary question to be addressed in these appeals was whether the calculation of holiday pay should include "non-guaranteed" overtime. In short the answer given by the EAT was yes.   

The ramifications of this decision could be far reaching, not to mention very costly, for businesses so much so that Business Secretary Vince Cable has already indicated that a task force is to be established to assess the impact of the ruling. We have set out the main principles flowing from the decision in the briefing note below.  We will also be discussing the implications of this decision, and the other 'live' holiday pay cases in detail at our HR Nightmares breakfast briefing on Thursday 6 November 2014. We hope to see you there.

The key points in the EAT decision in Bear Scotland –v- Fulton and others (and other consolidated claims)

  1. Non-guaranteed overtime should be taken into account when calculating holiday pay. This means that holiday pay will need to be calculated to include non-guaranteed overtime and similar payments in the future, at least for the twenty days’ leave provided by the Working Time Directive. 
  2. Point 1 above does not apply in relation to the additional 8 days annual leave conferred by Regulation 13A of the Working Time Regulations.
  3. Claims for arrears of holiday pay as unlawful deductions of wages will be out of time if there has been a 'gap' or 'break' of more than three months between successive underpayments (subject to the normal rules in relation to extensions of time being granted). In terms of potential retrospective liability for employers, this is appears to be welcome news.

We should mention that leave to appeal has been granted by the EAT.

The unanswered question

One important question in relation to the string of recent holiday pay cases remains outstanding, primarily because the facts of theBear Scotland cases did not require the EAT to consider this critical issue.  The key unknown is how far back can holiday pay claims go if there has not been a gap of three months between holiday pay payments which have been made? Is the answer six years or could these claims go right back to 1998 when the Working Time Regulations were first introduced?

It is the answer to this question that we believe will be of most interest (and concern) to employers.

Our comments and recommendations

We have noted a number of commentators indicating that employers can now breathe a sigh of relief in light of this decision. 

Unfortunately while the above question remains outstanding we do not concur that the decision presents as much cause for celebration as some might suggest. As such, we would recommend that we undertake the following legally privileged steps on your behalf:

  • Audit the different payments (e.g. commission, voluntary overtime, non-voluntary overtime, shift allowances and other premiums in pay) paid to workers in all parts of your business.
  • Review contracts of employment, contracts of engagement and staff handbooks to check that they accurately reflect how holiday pay is currently calculated and introduce any necessary amendments as quickly as is possible.
  • Carry out an audit of your workforce demographic - this will help identify how long potential liabilities might go back for.

We appreciate that all of the data needed to scope the potential holiday pay liability within your business will probably sit neatly within your payroll and HR departments and that you may feel that you can undertake these tasks yourself. This is true. However, you may not like what you find and you will be fixed with the knowledge and it will be disclosable in any litigation which may arise in the future. It is for this reason that we are recommending a legally privileged risk assessment be undertaken to identify potential exposure and to enable the business to consider a legally privileged contingency plan.

Although some key questions remain unanswered there are some positives that can be drawn from the EAT Judgment that will enable employers to take steps to limit any potential exposure.