As you will undoubtedly be aware, the much awaited Employment Appeals Tribunal (EAT) judgment in the combined holiday pay cases of Bear Scotland Ltd and ors v Fulton and ors; Hertel (UK) Ltd v Woods and ors; Amec Group Ltd v Law and ors is out.

The EAT has held that employers have to include 'non-guaranteed' overtime and the taxable element of travel allowances which compensate for travel time (rather than expenses) in their holiday pay calculations for four weeks' holiday each year. The implications of the decision are much broader.

Variable payments to be included in holiday pay

From now on, employers should consider including any variable payments which meet the test of normal pay (ie the payment is sufficiently permanent and intrinsically linked to the tasks the worker is required to carry out) in holiday pay. This could include shift pay, commission, certain bonuses and other similar variable payments unless the payments are genuinely ad hoc. Overtime that is guaranteed by the employer or compulsory for the employee will be covered. The position regarding truly voluntary overtime is less clear and would definitely not be covered if not worked regularly.

It appears that, for now at least, employers should use the 12 week reference period under the Working Time Regulations 1998 (WTR) to calculate this holiday pay.

Enhanced holiday pay need only be paid for the four weeks’ holiday per year required by European Law not the additional 1.6 weeks’ holiday provided by the WTR or any other enhanced contractual pay. Workers cannot choose which holiday will be paid at the higher rate. The first four weeks’ leave in any year will attract the enhanced pay unless the employer directs otherwise.

Good news on retrospective claims

The good news for employers is that the judgment limits the risk of significant retrospective claims for enhanced holiday pay. Where there has been a gap of more than three months between underpayments of holiday pay, the EAT has said that any series of deductions will be broken.

Claims for underpayments before the three month gap will normally be out of time. As the enhanced pay only applies to the first four weeks’ leave, it is likely that employers will have been paying the additional 1.6 weeks’ leave correctly. This significantly increases the likelihood that any series of underpayments has been broken by a gap of more than three months during the holiday year.

Leave to appeal the EAT’s decision to the Court of Appeal has been granted and an appeal is likely.

Get your records together

Employers should still be auditing their variable pay practices to assess their liability (future and historic) and the risk of claims.

Where backdated claims are concerned, the focus will be on your holiday and payroll records. Take steps now to secure payroll and holiday records dating back to 1 October 1998 and seek advice on whether the series of deductions has been broken and/or the advantage in settling historic claims.

Employers who are concerned that workers may benefit from windfalls where holiday is taken following peaks in variable pay should also consider adjusting pay schemes.

If you need advice on your holiday pay audit and an appropriate strategy for managing your risk, please speak to one of the employment team.