Warning to employers over holiday pay after landmark ruling

Employers who pay staff overtime are being warned that they may have to include any extra hours worked when calculating holiday pay, after a landmark ruling on 4 November 2014.

The decision in 3 cases - Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others - has been long-awaited by UK businesses, who will going forward have to allow for overtime when calculating employees’ holiday pay.

The claimants argued that they were required to consistently work overtime and that they therefore received considerably less pay when they had taken time off on annual leave than in normal working months.

Since the introduction of the Working Time Directive in 1998, the interpretation in the UK in relation to holiday pay was that employees would be entitled to 4 weeks’ paid holiday, with the rate of pay calculated as per their basic salary. The ruling from the EAT (Employment Appeal Tribunal) implies that UK businesses have been misinterpreting the directive and that actually, employers need to take other factors, such as overtime, into consideration.

Karen Credie of KMC HR commented: “This landmark ruling is something that all employers need to take note of. Whilst most businesses will have been duly paying staff for periods of holiday entitlement based on their basic salary, this will need to be addressed going forward to take into account the revised rules”.

Mike Emmott, employee relations adviser at the CIPD, said: “The UK government and employers have been acting in good faith in implementing the terms of the Working Time Directive over how holiday pay is calculated and it is disappointing the scope for ambiguity was not identified at a much earlier stage.”

The cases in the tribunal were based on claims for non-guaranteed overtime and a distinction was drawn between this and voluntary overtime, the latter of which was not directly addressed in the judgement.

Karen explains: “Non-guaranteed overtime is defined as time worked in addition to set working hours that there is no obligation for employers to provide but there is an obligation for employees to perform it if requested. Voluntary overtime, on the other hand, is where there is no contractual obligation for employees to work additional hours."

Whilst the news is not good for businesses, it does at least seem that they will be unlikely to face substantive retrospective claims from employees, as previously feared. The judgment confirms that claims for back pay will be out of time if there has been a break of more than 3 months between successive underpayments.

It is likely that the EAT decision will face appeal and it may therefore be some time until a definitive conclusion on the topic will be reached. But with further decisions due on whether commission, shift allowances and some types of bonuses should also be included in holiday pay calculations, this is certainly one for employers to keep a very close eye on. Karen concluded: “The advice on calculation of holiday pay remains unclear in some parts and employers should be advised to seek advice if they are at all unsure."