The Employment Appeal Tribunal (the EAT) has held in Bear Scotland v Fulton and Ors (the Bear Scotland case) that payments for overtime which an employee is required to work but which the employer is not obliged to provide (i.e. non-guaranteed but compulsory overtime) must be included in the calculation of a worker’s holiday pay in respect of the four weeks’ annual leave provided for under Regulation 13 of the Working Time Regulations 1998 (Regulation 13 Leave). We provide a summary of the current position on holiday pay and provide some practical tips for employers in light of this recent development.

Which payments should be included in the calculation of a worker’s holiday pay?

Case law has established that workers must receive their ‘normal remuneration’ during their Regulation 13 Leave (this does not apply to the additional 1.6 weeks of annual leave provided for by Regulation 13A of the Working Time Regulations 1998). This has been held to include payments which are intrinsically linked to the performance of the worker’s tasks required to be carried out under the employment contract (e.g. as in theBritish Airways v Williams case, a monetary amount for time spent flying). In addition, the EAT in the Bear Scotland case stated that a payment must be made for a sufficient period of time to count as normal remuneration.

Payments which should be included

Overtime: guaranteed and compulsory.
This concerns overtime which the employee is required to work and the employer is required to provide.

Overtime: non-guaranteed but compulsory.
This concerns overtime which an employee is required to work but which an employer is not obliged to provide.

Specific payments
Attendance allowance; radius allowance (taxable element only); travelling time allowance (taxable element only); London weighting; shift premia (e.g. night premiums, stand-by payments and emergency call out payments), status payments (e.g. an acting up allowance or a seniority allowance); and commission payments (as in the case of Lock v British Gas Trading (the Lock case)).

Payments which should not be included

Payments genuinely intended to cover the occasional or ancillary costs arising at the time of performance of tasks e.g. the reimbursement of pure expenses and costs such as the cost of a train ticket. Note that a determination by HMRC that a payment is not taxable will not be determinative and employment tribunals will be required to analyse the intention underlying the payment.

“Grey area” payments

Non-guaranteed and non-compulsory overtime i.e. purely voluntary overtime.
The EAT was not required to rule on whether voluntary overtime payments form part of a worker’s normal remuneration for holiday pay purposes and future litigation on this point is expected.

Annual incentive bonus.
If the bonus is unaffected by the taking of holiday, arguably it should not be included. An employer could argue that these are “extraordinary” elements of pay and therefore not intrinsic to the employee fulfilling his or her contractual duties. However, depending on its structure, it could be argued that the amount of the incentive is linked to performance.

Steps for employers

At this time, backdated claims for the underpayment of holiday pay are severely restricted as the EAT held that where there is a gap of more than 3 months between underpayments of holiday pay, a worker will not be able to bring a claim in the employment tribunal in respect of underpayments made prior to the gap.

Further, one issue not resolved in the Bear Scotland case, or in relation to commission in the Lock case, is the reference period in advance of a holiday that employers should use when calculating holiday pay. Should this be the 12 week reference period set out in the Employment Rights Act 1996? Or should employers adopt a longer period where necessary to ensure that payments included in the calculation of holiday pay in respect of, for example, overtime and commission are representative of those received by workers?

Although leave to the Court of Appeal has been granted on all issues raised in the Bear Scotland case, there is currently some uncertainty as to whether an appeal will be made.

However, the Lock case has been remitted to the Employment Tribunal, and it is hoped that further clarity on at least some of these issues will follow. The government also intends to set up a task force to assess the impact of the decision.

We recommend that employers first ‘take stock’ and then consider their strategy.

To do list

  • Carry out an audit of the different payments made to workers in the business.
  • Review how holiday pay is currently calculated to determine the amount of potential historic holiday pay liability and future liabilities.
  • Carry out an audit of workplace demographics and look at holiday patterns to identify how long potential liabilities may go back.
  • Consider potential impact on other benefit schemes such as pensions and other remuneration related benefits such as life cover and income protection.
  • Consider whether administrative systems need to be upgraded to deal with changes.
  • Deal with holiday pay grievances appropriately. A single successful grievance could escalate into multiple grievances in a large workforce.
  • Seek legal advice if faced with claims for back payments.
  • Consider whether to pay Regulation 13 Leave at a different rate to any additional annual leave entitlement.
  • Consider inserting language into annual discretionary bonus schemes to address the risk of it being included in holiday pay.

Possible strategies

High risk approach
Ignore the decision completely until the outcome of any possible appeal. This approach limits any immediate financial costs and administrative burdens of changing holiday pay structures, but does nothing to manage potential liabilities. It would also leave employers open to reputational damage through claims of unethical payment practices.

Medium risk approach

Adjust systems going forward to include payments for non-guaranteed compulsory overtime and commission when calculating holiday pay but do not address any past underpayments. Moving fast to include such payments could help to manage potential liabilities going forward and boost reputation. However, it could also be premature pending a final legal outcome and potential liabilities for past underpayments of holiday pay remain (although the extent of these will ultimately be determined by the outcome of any appeal if made).

Low risk approach
Adjust systems to include payments for non-guaranteed compulsory overtime and commission when calculating holiday pay and address past incorrect payments. This is a low risk approach in respect of managing potential liabilities but potentially premature financially and administratively, particularly if the current decision on back payments should stand.