We have all heard about the Lock v British Gas case.

And before that, the Williams & others v British Airways case.

Both cases involve decisions of the European Court of Justice regarding the calculation of holiday pay.

And we now have a decision from the Employment Appeal Tribunal (EAT) regarding the calculation of holiday pay in the Bear Scotland Ltd v Fulton case.

These decisions concern whether holiday pay should include amounts to reflect payments such as overtime and commission for employees who have normal working hours.

What is the background to this?

Under our Working Time Regs (WTR), workers receive a week’s pay for each week of leave.

The Employment Rights Act (ERA) sets out what is a week’s pay – and the provisions are complicated!

In essence, if a worker has normal working hours – even if they also receive non guaranteed overtime or receive commission – a week’s pay is basic pay only under the ERA.

The Bear Scotland decision

But, in the Bear Scotland case, the EAT decided:

  1. Non guaranteed overtime – worked regularly – is to be regarded as normal remuneration and should therefore be included in the calculation of holiday pay. Non guaranteed overtime is overtime that the employer is not obliged to offer, but workers are obliged to work, if offered. According to the EAT, the essential point is that normal pay means pay which is normally received – so the payments have to be made for a sufficient period of time to justify the label of normal pay.
  1. It is possible to read words into the WTR to give this result.
  1. This decision only applies to the 4 weeks’ leave derived from the European Working Time Directive, not the additional 1.6 weeks’ leave provided for by the WTR. So there are two ways to calculate holiday pay depending on whether the holiday is part of the 4 weeks or 1.6 weeks!
  1. The EAT considered the argument that employees could claim holiday pay going back potentially years on the basis that there has been a series of unlawful deductions from wages. The “good” news is that the EAT said if more than 3 months has passed between underpayments, that breaks the series – subject to extending time if it wasn’t reasonably practicable to present the claim in time. This may significantly limit the effect of this landmark.

The decision of the EAT is now being appealed to the Court of Appeal, so things may change again.

But, the EAT said it is unlikely the decision that holiday pay should include overtime will change on appeal, but its decision that you can break a series of deductions may be overturned on appeal.

The Government has also set up a taskforce to look into limiting the impact of this EAT decision; so this saga is far from over.

What should we do now?

Carry out a risk assessment.

Do workers work regular overtime?

How many work regular overtime?

What type of overtime do they work – guaranteed, non guaranteed or voluntary?

What is the potential historical liability?

Check if there has been a recent period of more than 3 months since workers took and were paid for holiday. If so, this could break a series of deductions.

Can you create a break of more than 3 months since workers last took and were paid for holiday?

Once you have carried out a risk assessment you need to decide what you want to do next – do you wait for the decision on appeal, do you start paying holiday to include overtime from now on, do you look at settling historical claims, in any event do you try to create a 3 months gap as mentioned above?

This is a big issue for some businesses.

The option you chose may depend on your business – what is the potential cost of, and risk associated with, each option?

Contact us if you would like to discuss the potential implications for your business, the best option for you at this time and possible strategies for seeking to limit the potential effect of this decision.

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