Calculating holiday pay has become more complex over the past few years. Key cases include Bear Scotland Ltd v. Fulton and Lock v. British Gas, which focus on the issue of whether payments such as certain overtime, commission and bonuses should be included in holiday pay – and the courts determined that certain payments should. Bear Scotland has spent much time in the courts where the complexities of calculating holiday pay have been considered. This recent appeal is good news for employers: it deals specifically with the three-month gap between payments which breaks the series of deductions, hence preventing an unlawful deductions claim.

Facts and background

In 2012 and 2013, David Fulton and Douglas Baxter brought unlawful deductions from wages claims against Bear Scotland. They claimed that overtime and other supplemental payments were excluded from the calculation of their holiday pay and therefore they were underpaid. Fulton and Baxter asserted that this was contrary to the Working Time Regulations 1998.

An important and welcome aspect of the Employment Appeal Tribunal's (EAT) earlier decision in Bear Scotland Ltd v. Fulton was that an interval of more than three months between underpayments will "break the chain" of the series and prevent a Tribunal claim for underpayment of wages/holiday pay from reaching back prior to that break. However, this aspect of the EAT’s decision on "breaking the chain" was challenged, leading to the most recent appeal.

The decision

The EAT has confirmed its previous position that an interval of more than three months between underpayments will "break the chain" of the series and prevent a Tribunal claim for underpayment of wages from reaching back prior to that break.

The decision states that a period of more than three months is generally to be regarded as too long a time to wait before making a claim. The focus on the word "generally" must be understood in the context of it being a clear rule, albeit with an equitable discretion to extend time, rather than a presumption rebuttable in undefined and open-ended circumstances.

What is the practical impact on employers?

This is very good news for employers. Recent holiday pay decisions require the inclusion of commissions and overtime in the calculation of holiday pay only in respect of the basic EU Working Time Directive four-week minimum holidays, and not to the additional 1.6 weeks added by the UK Working Time Regulations, or any further holiday provided for by the employment contract.

For example, if one assumes a holiday year to be the same as the calendar year, an employee gets their new holiday entitlement from 1 January. Three months prior to that is 30 September. Therefore, if the employee had taken four weeks' holiday (including bank holidays) by or before the end of September, there is a relevant gap. It will not matter that the employee then took all or any of the remaining 1.6 weeks or any additional contractual entitlement between 1 October and 31 December.

Practically, the decision limits employers' exposure to unlawful deduction from wages claims. Employers should analyse the potential impact of the Bear Scotland decision by looking at pay structures, holiday pay records and general workforce awareness of the issue. A central monitoring process will also ensure that any claims for holiday pay (or claims which involve a holiday pay element) are logged, to enable employers to perform an effective assessment of liability. By way of reminder, from July 2015, a two-year limit on backdated claims for holiday pay was introduced.

While this decision does not get round the administrative burden of calculating holiday pay, it is welcome news.