You will probably have seen that there has been an important ruling on holiday pay by the Employment Appeals Tribunal (EAT) today. The EAT in Bear Scotland v Fulton (and combined appeals) has held that holiday pay must include both guaranteed and non-guaranteed overtime. This briefing considers the key take away points and next steps for employers.

Key points

The key points to note from the EAT ruling are as follows:

  • Until now employers have only taken into account guaranteed overtime in their calculations of a week’s pay for holiday pay purposes. This was a rational approach to the calculation of holiday pay for workers with normal working hours as the definition of normal working hours used by the Working Time Regulations 1998 (the Regulations) when calculating a week’s pay only referred to guaranteed overtime.
  • Now, however, the EAT has adopted a purposive interpretation of the Regulations and said that they must be read to be consistent with the overlying Working Time Directive (2003/88/EC, the Directive). Article 7 of the Working Time Directive requires workers to be paid their ‘normal remuneration’ during holiday to which the Directive applies. The EAT has ruled that ‘normal remuneration’ includes pay in respect of non-guaranteed overtime, ie overtime which workers are required to work when it is offered by the employer but of which there is no guarantee.
  • The ruling does not apply to all holiday which a UK worker is entitled to take. It only applies to holiday to which a worker is entitled by virtue of EU law, ie the Working Time Directive - the Directive gives an entitlement to 20 days’ holiday not the 28 days’ holiday to which workers are entitled under the Regulations.
  • The EAT has placed an important limitation on retrospective claims, which will be welcomed by employers. The claim which a worker can bring for failure to take into account overtime when calculating holiday pay is an unlawful deduction of wages claim. The limitation period for this type of claim is three months from the deduction or the last deduction in a series of deductions. The EAT has held that where there has been more than a three month gap between two periods of holiday in respect of which a worker has been underpaid for overtime, the worker’s ability to back-claim will be limited to the most recent period of leave.
  • In addition, it has held that a worker cannot choose which period of leave qualifies as ‘EU holiday’ and therefore the potential for a worker to back claim is even more limited. For most workers it is expected that claims should be limited to this holiday year – unless a worker has taken very regular periods of leave. This is a significant point for employers as it had been feared that employers might have had to pay up to 16 years of underpaid holiday pay (since the Working Time Regulations came into force in 1998). Subject to any appeal, this should provide significant comfort to employers in respect of historic costs, particularly those who did not make any provision for retrospective overtime holiday pay claims.
  • The limitation on retrospective claims is particularly helpful in the context of the inherited liabilities of an employer in the transactional context. While it will be necessary to review sale documentation to confirm whether any indemnities are broad enough to protect a purchaser against historic costs, at least there is comfort that any historic liabilities should generally be limited to this holiday year.

Next steps

  • You should now undertake a review of your workers’ holiday records to determine how much of an historic issue the ruling is for your business. The most important points to focus on are:
    • the ruling only applies to 20 days’ ‘EU holiday’ each year and it seems from the ruling that an employer can choose which 20 days it applies to;
    • any three month gap between any periods of ‘EU holiday’ will limit the ability of a worker to back-claim
  • If you are currently working on a transaction, consider how to take account of the ruling in the drafting of your indemnity protection.

Government reaction

Business Secretary, Vince Cable has today announced that he will be putting together a taskforce of employers’ associations to assess the impact of the ruling. There have been suggestions that this ‘assessment’ may look at ways of limiting the impact of the ruling.