The Employment Appeal Tribunal has confirmed that overtime should be taken into account when assessing holiday pay. James Baker and Clare Taylor consider the recent decision in the joined appeals of Bear Scotland v Fulton, AMEC Group v Law and Hertel v Woods.

The Employment Appeal Tribunal, in the joined appeals of Bear Scotland v Fulton, AMEC Group v Law and Hertel v Woods has confirmed that overtime should be taken into account when calculating holiday pay.

EAT Decision

The EAT decision confirms that employees must be paid their ‘normal pay’ during periods of statutory annual leave, ‘normal pay’ being that pay which is normally received. Therefore, employees who are normally paid overtime must also receive those overtime payments in their holiday pay. As the emphasis is on ‘normal pay,’ it follows that overtime must have been paid to the employee for a sufficient period in order to be classed as ‘normal’ meaning employers will need to use a reference period to determine normal pay. The EAT has not suggested a satisfactory reference period, but 12 weeks is likely to be viewed as reasonable by the courts.

Note that this applies to the mandatory 20 days’ annual leave awarded by EU legislation (‘Qualifying Leave’). It does not apply to the additional mandatory 8 days’ leave required by UK legislation, nor any additional leave offered by individual employers.

The EAT has also confirmed that while a consistent failure on the part of an employer not to pay employees overtime during periods of annual leave may amount to an unlawful deduction of wages, any claim must be brought within three months of the last deduction. This means that any period of three months in which either (i) no Qualifying Leave was taken or (ii) no unlawful deductions from Qualifying Leave payments were made will ‘break’ the series of deductions and a claim cannot be brought for earlier underpayments.

The case does not, however, change the calculation of holiday pay for those employees who work additional hours without extra payment.

What is next?

The EAT’s decision has been met with concern by employers and business groups. The Department of Business, Innovation and Skills (BIS) has announced a taskforce to try and limit the impact of the ruling on businesses. The EAT has also granted permission to appeal to the Court of Appeal so this may not be the final decision on this issue.

Even on appeal, however, it is unlikely that the position regarding inclusion of overtime in the calculation of normal pay for holiday purposes will be reversed.

In light of this ruling, employers are advised to review their policies on holiday pay and provide for workers who are usually paid overtime to receive these payments as part of their usual holiday pay. As claims can only be brought within three months of the latest unlawful deduction, adjusting the holiday pay policy as soon as possible to include overtime would be well advised to avoid any potential claims for a continuing series of unlawful deductions. Employees who have taken or are to be paid holiday pay in the current period should certainly be paid at the higher rate to prevent the three month time limit running from this month.

Please note that these are general principles which will apply differently to individual cases. Employers will need to analyse each employee’s personal situation to assess whether they have a claim for unlawful deductions from their Qualifying Leave entitlement.