The Employment Appeal Tribunal rules that holiday pay should include overtime, but employers gain  some relief as the scope for back pay claims is restricted

The UK Employment Appeal Tribunal (EAT) has today handed down its decision in the conjoined 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.

The position in the UK had been very clear for many years. Workers with normal, basic working hours  under their contract have had holiday pay calculated using just those basic hours and basic pay.  Overtime pay has not been included. This was confirmed as the correct approach about ten years ago  by the Court of  Appeal (Bamsey and others v Albon Engineering and Manufacturing plc [2004] IRLR  457) so employers had a high level of comfort that basic pay is the correct approach for holiday  pay.

The European Court of Justice (ECJ) in British Airways plc v Williams and Others [2012] ICR 1375  said that holiday pay needed to include “normal remuneration”, which includes payments “linked  intrinsically to the performance of the tasks which the worker is required to carry out under his  contract of employment”.

Earlier this year, the ECJ (Lock v British Gas Trading Limited and others (C-539/12)) held that  holiday pay needed to include commission payments. It didn’t explain how businesses are supposed to  do that, and the case has gone back to the UK tribunal to be heard in February.

The EAT has now decided that overtime needs to be included in holiday pay, even though it means  that the UK Working Time Regulations have to be interpreted in a different way from how they were by the Court of Appeal in the Bamsey case ten years ago. The  EAT decision has been reached because of the need to comply with the European Working Time  Directive, as interpreted by the ECJ. Mr Justice Langstaff, in delivering his decision, refused to  refer the case to the ECJ on the basis that there was no need - the European position is clear.

The decision applies only to the four weeks’ holiday per year that the European Working Time Directive requires, not the additional 1.6 weeks that are given under the UK rules -  and also not to any additional contractual holiday employers may offer.

There were fears that the decision could mean claims against employers for a shortfall in holiday  pay going back many years. The EAT has said that claims  for back pay can only be pursued in a  tribunal if there is no more than a three- month gap between times when the four week European  minimum holiday is taken. As soon as there is a three-month gap, it means that earlier shortfalls  cannot be pursued in a tribunal. Also, workers do not decide which holidays are the European four  weeks and which are the UK ‘extra’. This gives employers considerable scope to limit claims.

There might be scope for arguing that the decision relates only to overtime that the worker is  required to do, and does not apply to overtime that is genuinely voluntary. The decision leaves  that line of defence for employers slightly open.

We can expect the decision to be appealed - leave has been given to appeal to the Court of Appeal,  and a later appeal to the Supreme Court is also likely. There may also be a need to refer the case  to the ECJ at the later stage, even though the EAT chose not to do so at this stage.

Despite the fact that the overtime and commission cases roll on, employers  need to come to terms  with the fact that the days of just paying basic pay during holidays are over.

Employers that are not doing so already should plan for how to reduce the impact of this decision  and budget for increased costs. The increased costs may have an effect on planned pay rises,  approaches to overtime, commission criteria and recruitment.

Employers should also review their holiday policies - before the decision it did not matter whether  a particular day’s holiday counted as “European leave”, “UK extra statutory leave” or “additional  contractual leave” as the pay was the same for each. Now that the EAT says that “European leave” is  at a higher rate of pay, there are now two types of holiday and the approach to booking holidays  will need to be adapted to take that into account.

As for calculating holiday pay during the “European leave” to take into account overtime, the  implication from the EAT decision is that employers need to look at the average pay (including  overtime) over the 12 weeks prior to the start of that holiday. If overtime is irregular, workers  may try to take holiday shortly after a period of high levels of overtime. However, remember it is  not just for   the worker to decide which holiday is “European leave”. In practice, it seems that  the employer will be able to decide – if workers are getting at least four weeks’ holiday with pay  that takes into account overtime, it would be difficult for them to establish a claim that it should be different weeks.