The Employment Appeal Tribunal (EAT) has finally issued its judgment on holiday pay in three combined cases including Bear Scotland Ltd v Fulton.
The two central issues considered by the EAT were whether payments such as overtime and other allowances earned by workers should be included in the calculation of holiday pay and, if so, how far back in time could workers claim for underpaid holidays.
What payments should be included in the calculation of holiday pay?
The EAT held that, a worker’s holiday pay should include payments linked intrinsically to the performance of tasks required to be carried out under their contracts. The basic principle is that a worker should not be financially worse off when taking leave, which may deter them from taking it. In summary:
- Where the worker can be required to work overtime such payments should be included in the holiday pay calculation.
- No definitive ruling was given on whether purely voluntary overtime should be included. Acas has commented in its guidance that ‘it may also be that regular voluntary overtime should be included if it is part of a worker’s normal remuneration’. This remains a grey area.
- Certain allowances comprising payment for time spent travelling to various sites (but not travel expenses) should be included.
- Although the claims being heard last week did not include commission the Judge referred to commission on sales being included in holiday pay as a ‘settled view’ of the ECJ suggesting that it should be included.
How far back in time can claims for backdated holiday pay be made?
The time limit for filing an employment claim for unlawful deductions of underpaid holiday is three months (unless not reasonably practicable). Workers can claim for a series of unlawful deductions extending back in time; although it seems unlikely now that such claims for underpaid holiday will go as far back as 1998 when the UK’s Working Time Regulations were implemented, as was feared. The EAT made two findings that it is hoped will significantly limit the extent of claims for back pay.
The first is that this Judgment only applies to the first four weeks of a worker’s leave entitlement required by European law and not the additional 1.6 weeks required by UK law or any contractual leave, which can continue to be paid as basic pay. The second is that where there is a gap of three months or more between deductions then this breaks the series of deductions.
So, for example, if an employee took leave in January but did not then take leave again until June, if he subsequently brought a claim in respect of the June underpayment he would not be able to claim for the underpayment in January because there is more than a three month gap between the two deductions. Even if the claim could extend back by linked periods of leave to 2013 there is likely to be a gap of three months between the first day for which leave was underpaid in the 2014 leave year and the last date on which it was underpaid in the 2013 leave year. Remember, when looking for the last underpayment in 2013, payments for the final 1.6 weeks of statutory leave in that leave year or any additional contractual leave are ignored.
What is the impact on employers?
This Judgment does not give all the answers in a complex area of law. There is continuing uncertainty for employers which seems unlikely to be resolved in the short term, as the EAT has granted leave to appeal its Judgment.
In the meantime the Government has set up a task force of employer representatives to consider the impact of this Judgment. We are tracking developments and will keep you updated.
We suggest that employers now assess the potential costs to their businesses of any extra holiday pay entitlement going forward. You may need advice on which payments ought to be included in calculating holiday pay.
You will then have several options. You may decide for example to fund increased holiday pay, or to make a one off payment to break the series of underpaid holiday pay, or run the risk of claims. Anticipating this Judgment, we have put together some options for you to consider in order to protect your business.
Contact your usual adviser in the team if you have any queries on this or any other employment law matter. Click here to meet the team.