Yesterday’s decision by the Employment Appeal Tribunal (“EAT”) in Bear Scotland Ltd v Fulton and ors (and conjoined cases) on holiday pay has the potential to affect any employer that requires its workers to work overtime. The EAT held that both guaranteed and non-guaranteed compulsory overtime worked by a worker should be included when the employer calculates his or her holiday pay. Importantly, employees can also make claims for backdated holiday pay.

Impact on employers

The decision in Bear Scotland confirms that overtime required to be worked by workers under their contract constitutes part of their ‘normal’ pay. This important finding means that compulsory overtime should be included when calculating holiday pay. ‘Overtime’ in this decision related to non-guaranteed overtime, that is, overtime which the worker is required to work if so asked by the employer but which the employer does not guarantee to provide. Strictly speaking, voluntary overtime (overtime which the worker is not contractually obliged to perform) is not covered by the decision. However, given European case law, it seems very possible that voluntary overtime will be included in calculating holiday pay going forward.

Yesterday’s decision held that any claim for backdated holiday pay is normally only valid if the ‘unlawful deduction from wages’ was made in the past three months or was one of a series of deductions, the last of which occurred in the past three months (with no more than three months passing between each deduction in the series). This will be of some comfort to employers and mitigates some of the concerns that were being reported in the press that claims could be backdated to 1998, but this could still represent a large bill nonetheless. Query whether there is any possibility of a breach of contract claim, going back six years. It will mean that claims can still be made in relation to the end of the busy summer holiday season, if the employee is quick off the mark. Workers are being encouraged to contact their union or ACAS in order to make their claim. Time will tell how big the uptake will be among workers, although some unions have already filed claims which have been stayed pending yesterday’s outcome.

The ruling limits the application to the basic four weeks of holiday that a worker is entitled to under the EU Working Time Directive. However, UK workers are entitled to a further 1.6 weeks of holiday under the Working Time Regulations, to which this ruling does not apply. This raises the possibility that different rates of holiday pay may be applied to different parts of an employee’s holiday entitlement with the consequent difficulties of actually administering this.

Continued uncertainty

To further complicate matters, readers may recall the recent case of Lock v British Gas Trading Ltd, in which the Court of Justice of the European Union held that, in some circumstances, a worker’s commission payments should be included in the calculation of holiday pay (see our blog). Lock was referred back to the UK in order to be applied by the Employment Tribunal, but this has been delayed until February 2015. In yesterday’s case, leave to appeal to the Court of Appeal was granted, particularly in relation to the issue of backdated holiday pay, although a reference to the Court of Justice of the European Union was refused. An appeal is expected to be lodged. As a result, the financial impact on employers is unknown, but as a result of both of these developments, it is expected that it will nonetheless be significant. As we mentioned in our earlier blog, the difficulties of devising a scheme that conforms to these recent decisions will be challenging, and further clarity will be needed.

Going forward

As referred to above, it is very difficult to see what the future will bring for holiday pay. Following yesterday’s judgment, the Business Secretary, Vince Cable, announced that BIS will be setting up a taskforce to urgently assess the impact on businesses. However, this taskforce does not include any unions or employee representatives. One issue that the Institute of Directors (“IoD”), a member of the taskforce, has already highlighted is that workers could now be more likely to book holiday after periods of higher than normal overtime, as this would increase the amount of holiday pay payable (holiday pay usually being calculated by reference to the average of the previous 12 weeks’ earnings). The IoD has called for Parliament to legislate against this outcome.

A further consequence already highlighted is that, with costs for all employers increasing, it may be that it is more cost effective longer term to use agency staff rather than to encourage overtime to be worked by employees.

What is clear is that the holiday pay saga will continue to run for a while yet.