It’s that time of year again - Christmas is a distant memory, it’s cold and dark outside and we’re dreaming of a long summer holiday! As employers, we were all mistaken for thinking that holiday pay was a simple matter until a recent raft of case law changed things.

In the case of Bear Scotland Ltd v Fulton, the Employment Appeals Tribunal (EAT) held that employers have to include overtime in employees’ holiday pay calculations. This decision also applies to other ‘variable’ payments made to employees in addition to their basic salary, such as overtime, regular bonuses and on call allowances. Whereas before, holiday pay would often just comprise basic salary, now it needs to include other payments which are regular and more than just ad hoc – such as an annual bonus.

As providers of social housing, you may have employees whose take home salary is not just a basic payment but includes other payments such as overtime. In this instance, you need to consider your workforce and assess whether you have employees who regularly receive additional payments which may need to be accounted for in their holiday pay.

The crux of the decision is that, when an employee goes on holiday, they should receive the same amount of pay as they would if they had been at work. There should not be a financial incentive to continue working without taking any holiday simply because, if they continue to work, they receive overtime pay (for example) which they would not receive if they went on leave.

The principle then is fairly simple. The pay is the same whether you are at work or on holiday. But, in reality, that is not always easy to calculate. An employee might work overtime or receive other allowances but they will not necessarily do the same each week or month. So how do you calculate their holiday pay? Currently, the view is that you look back over a 12 week reference period to assess what they had worked and been paid for during that time. You then use that as a reference point to determine the holiday pay.

On the face of it, it seems that the decision could have significant financial consequences. However, it is worth remembering the following:

  • this only relates (at the moment) to payments which are ‘guaranteed’ by the employer and/or overtime (for example) which, if offered, the employee has to accept and perform. It is less clear that this applies to overtime which is entirely voluntary and up to a) the employer whether they offer to do it and b) the employee whether they accept;
  • as above, the payments need to be regular and not ad hoc. As a very general rule, weekly or monthly payments are likely to be captured but a quarterly/annual bonus probably would not be;
  • this ‘enhanced’ holiday pay only needs to be made for 20 days’ worth of holiday. So if the employee is entitled to 30 days’ holiday, for example, then you only need to pay the additional sums for 20 days, not all 30. That may seem odd but it stems from European rights (the European entitlement to holiday being 20 days, the rest is either a UK entitlement, or a company one);
  • there are also additional issues about how far back an employee can claim additional holiday pay if they have been paid ‘incorrectly’ for some time. The courts have indicated that, where there has been a gap of three months or more between periods of holiday, then the chain of underpayments has been broken and an employee cannot claim any further back.

Finally, to limit the impact of this decision, the Government has acted quickly to introduce new legislation to protect employers. The Deduction from Wages (Limitation) Regulations 2014 came in to force on 8 January 2015 and provides that an employee can only claim up to two years of backdated holiday pay. This change only affects claims made by employees on or after 1 July 2015 but helps to limit how far back an employee can claim for holiday pay where they have taken holiday consistently over the years with less than a three month gap in between.

In terms of your particular workforce and the potential impact of this decision, the first thing to do is to consider whether you have employees who receive additional payments. If so, are these regular? If they are, then you need to consider whether there is a financial disadvantage when they go on holiday compared to when they are at work. The chances are that, if there is, you will need to reassess how you calculate their holiday pay and consider whether there is a risk of claims for previous holiday payments.