Holiday Pay - Not As Bad As It Could Have Been - McDermott Will & Emery

Holiday Pay – Not As Bad As It Could Have Been

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In Depth

Yesterday, the Employment Appeal Tribunal (EAT) gave its long-awaited decision in Bear Scotland v Fulton and Ors on whether or not overtime should be included in holiday pay.

Some key questions are answered below but, as an overview:

  • overtime does need to be included in holiday pay, but
  • workers won’t be able to sue for underpayment going back to the implementation of the Working Time Regulations (WTR) in 1998.

How Much Holiday Pay do I Have to Pay Workers Going Forward?

What is The Basic Principle I Should be Looking to Apply?

A worker should be paid holiday pay at the same rate as his or her “normal pay”. Normal pay includes all elements of pay that are directly linked to the work the worker is required to carry out.  Essentially, a worker should not be paid less than he or she usually would just because they take holiday.

What Elements, Other Than Basic Salary, Could That Include?

Common elements such as commission, shift allowances and, of course, overtime.  In short, any amount that the employee is normally paid by the employer for doing his or her job, rather than as reimbursement for expenses.

It is unclear from the judgment whether genuinely voluntary overtime should be included in holiday pay.  However, to be included, the pay in question should be “normal”, i.e. have been paid for a sufficient period of time to justify being called “normal”.

Therefore, where there is a settled pattern of work, and a correspondingly regular overtime payment, that overtime payment will be “normal”.  It should therefore be included in the worker’s holiday pay.  However, where payments are not so settled or regular, there might be greater scope for an employer to push back on their inclusion in holiday pay.

Perhaps a pragmatic way to look at the issue is this: will the employee feel as though he or she is losing pay by taking holiday?  If so, because he or she would usually receive more than just basic salary, then that overtime or allowance should probably be included in his or her holiday pay.  If not, because the worker doesn’t often get overtime or allowances, then it is more likely that those sums won’t count as “normal pay” and do not therefore need to be factored into holiday pay.

How Do I Calculate How Much Holiday Pay is Due?

The EAT has tried to shoehorn this new approach to holiday pay into the existing legislative framework, albeit with some amendment.  That means calculating holiday pay by reference to a “week’s pay” as set out in the Employment Rights Act 1996 (ERA).

By way of overview, where a worker’s pay fluctuates, a week’s pay (and thus a week’s holiday pay) is the average amount the worker earned in the 12 weeks immediately before the holiday is taken.  It is, however, not clear whether the statutory process allows for sums which are not “normally” incurred to be omitted from that calculation.

In any event, as the EAT appreciates, a 12 week calculation period may prove impractical for some businesses or workers, particularly those that experience short seasonal spikes in activity.

Can We be Sued For Some Historical Holiday Underpayments?

Yes, but not as much as was expected.

What Claim May be Brought by A Worker Looking To Claim Back Historic Holiday Underpayment?

The most likely claim is that a worker has suffered an unlawful deduction from wages (UD claim).

A Tribunal can only deal with a UD claim if it is brought within three months of: (a) the date of underpayment; or (b) if there has been a series of deductions, within three months of the last deduction in the series.  The exception is if the Tribunal decides that the deadline should be extended because it wasn’t reasonably practicable for the claim to have been brought in time.

The workers in Bear sought to argue that all historical holiday underpayment should be treated as being a “series” of underpayments so, as long as the claim was brought within three months of the most recent underpayment, all underpayments could be covered by it.

When Will There be A Series of Deductions?

The EAT has decided that only deductions made within three months of each other count as part of the same series.

This means that workers who took holidays more than three months apart will only be able to claim for the most recent holiday taken.  This will significantly limit the number of retrospective holiday days in respect of which a worker will be able to claim underpayment.

Are There Any Other Limits On What A Worker Can Claim For?

Yes. It is only the four weeks (20 days for a full-time worker) holiday required to be given to workers by the European Working Time Directive (mandatory holiday) that must include overtime, etc.

The additional 1.6 weeks (eight days for a full-time worker) given to workers in the UK, and of course any other additional holiday given by the contract of employment (additional holiday), may continue to be paid as basic pay, unless the contract provides for something different.

Which Holiday Days Are Mandatory Holiday And Which Are Additional Holiday?

The EAT noted that a natural reading of the Working Time Regulations is that mandatory holiday is taken first in the holiday year.

This would increase the likelihood of a worker having a gap of at least three months between periods of mandatory holiday, particularly across holiday years.

This is Good News, But Will This Decision be Appealed?

Almost certainly.  The EAT has already given leave to appeal on the key issue of whether or not the right to bring a claim for underpayment of holiday pay is lost if a worker has gaps of three months or longer between periods of holiday.

Where Does This Leave Employers?

In a better situation than expected, for now at least. While workers (current and former) might be able to bring unlawful deductions claims for recent holiday, it is very unlikely that they will have taken periods of mandatory holiday close enough together to bring a claim that reaches very far back in time.

Employers should, however, note that workers and their advisors may therefore consider other avenues, such as pursuing a breach of contract claim in the county or High Court.

Employers should now identify those workers who work overtime regularly or who receive regular job-based allowances.  Historical holiday dates will now determine the size of any potential claim, so consider whether your holiday records are adequate to allow you to track historical holiday accurately.  If records are not up to it, consider upgrading your systems.

However, for the time being, employers may think it premature to rush to change holiday pay arrangements given the likelihood of an appeal and (hopefully) of Government intervention to regulate the practicalities of how holiday pay should be calculated going forward.

The potential responses to this decision are many and varied.  Each employer will need to consider its own practices and environment and we would be delighted to discuss this with you in greater detail.