Changes in the law on holiday pay, about which all employers need to know.

Until recently employers in the UK had generally been required to pay holiday pay based on basic pay only. That approach had been thrown into doubt by the European Court of Justice, and earlier today, a long-anticipated decision in the joint appeals of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and other; and Amec Group Limited v Law and others, which clarifies some of important issues was handed down by the Employment Appeal Tribunal.

We set out below the key points from that judgment:

  • Normal pay has to be paid in respect of annual leave;
  • Accordingly pay for overtime which a worker is “required” to carry out, even if that overtime is not guaranteed, should be included in holiday pay, and the Working Time Regulations 1998 can be read as complying with the Working Time Directive to give effect to this. This appears to discount the possibility of claims for purely voluntary overtime being included in holiday pay;
  • Other components of normal pay over and above basic salary should also be included in the calculation of holiday pay, where there is an intrinsic or direct link to tasks which a worker is required to carry out, and payment is made for a sufficient period of time to justify the “normal pay” label;
  • Workers are entitled to claim holiday pay backdated to previous leave years as claims for unlawful deduction from wages, if the claim is made no more than three months after the last in an unbroken series of deductions. A gap of more than three months where no unlawful deduction was made extinguishes the right to bring a claim relating to the earlier period. The additional 1.6 weeks’ leave to which workers are entitled in the UK is taken after the 4 weeks minimum entitlement under the Directive. There may therefore be a gap of over three months between the 4 weeks minimum which is taken each leave year, thereby breaking the chain of deductions. In practical terms, this may mean that many historic holiday pay claims will be limited to the most recent leave year.

Permission has been given for the decision to be appealed to the Court of Appeal, particularly with reference to the issue of claims for backpay, which the Judge noted was an issue of “public importance”. These points are a cause for serious concern for many employers, particularly given the scope for complex litigation.