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Holiday Pay

In a decision yesterday in the case of Fulton v Bear Scotland and two related cases, the Employment Appeal Tribunal (“EAT”) held that holiday pay during the 4 weeks of annual leave required to be provided to all workers under the Working Time Directive (20 days for a full time worker) should reflect any pay received in respect of non-guaranteed overtime. Employers may still be able to argue that overtime which is genuinely voluntary need not be included in such holiday pay, as this point was not determined by the EAT.

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The wider implications of this decision, together with recent decisions of the European Court of Justice, would appear to be that many other payments – including certain commission, supplements, enhancements and allowances – which are intrinsically linked to the performance of a worker's duties must be taken into account in the calculation of holiday pay during 4 weeks of annual leave. It is important to emphasise that this principle does not apply to:-

(a) the additional 1.6 weeks’ leave that workers are entitled to under the Working Time Regulations,

(b) any additional leave that agricultural workers are entitled to under the Agricultural Wages Order 2012 (who, if in England, commenced employment before 1 October 2013) or

(c) otherwise (unless the contract stipulates to the contrary) any additional annual leave that is granted under the terms of a contract of employment.

It is also important to note that it was already the case, and it remains so, that pay relating to guaranteed overtime is required to be reflected in each worker’s holiday pay throughout their full 5.6 week annual leave entitlement under the Working Time Regulations (28 days for a full time worker) or any holiday entitlement under the Agricultural Wages Order.

When calculating average pay for the purposes of determining holiday pay entitlement, the UK legislation provides for a 12 week reference period preceding the period of annual leave. It is questionable whether applying that reference period will result in a payment of holiday pay that is truly reflective of a worker’s earnings in all cases, and therefore whether it complies with European law when applied to the core 4 week annual leave entitlement under the Working Time Directive. However, in its decision the EAT held that it was appropriate to apply the reference period determined by the relevant Member State and so, at least as far as private employers are concerned (as opposed to state employers, in respect of whom European law has direct effect), and for the time being, it will be appropriate to still apply the 12 week reference period.

However, where doing so will result in payments of holiday pay which are not reflective of an employee’s overall levels of remuneration to the employee’s detriment (e.g. in the case of an employee who works a lot of non-guaranteed overtime but who happens to take holiday during a part of the year when there has been little or no overtime available in the preceding 12 weeks), employers might consider adopting a more fitting method of calculating holiday pay in order to avoid potentially costly disputes, and future liabilities in the event that the 12 week reference period is later determined to be inappropriate.

The EAT’s decision has retrospective effect, meaning that workers can potentially claim for underpayments of holiday pay going back as far as the beginning of their employment or 1 October 1998 (the date the Working Time Regulations came into force), whichever is the later. However, (subject to the effects of the Acas pre-conciliation procedure and otherwise rules relating to the extension of time limits) the normal rule is that employees have just 3 months from the date of the last underpayment of holiday pay to make a claim for unlawful deduction from wages in the employment tribunals. If they bring such a claim in time, they can include all other underpayments of holiday pay which form part of the same series of deductions – but in a new development, the EAT ruled that where there is a gap of more than 3 months between successive underpayments, the deductions will not be treated as part of the same series.

Employers whose contracts of employment state that holiday pay will be calculated in accordance with the Working Time Regulations should note, however, that employees will be able to bring claims for breach of contract to recover underpayments of holiday pay based on the above principles going back 6 years if they miss the 3 month window for an unlawful deduction claim, or if they are within the 3 month time limit but have suffered earlier deductions that do not form part of the same series and so could not be included within a statutory claim.

In anticipation of the EAT’s decision, we have successfully advised many employers on taking pre-emptive steps to prevent exposure to claims by employees for potentially very significant, historic underpayments of holiday pay. The EAT gave permission for an appeal to the Court of Appeal and therefore a final decision on the relevant points could be years away – but employers who have not already taken appropriate steps should act now to address the position as it currently stands.

Holiday pay audit for employers

For a fixed fee we will carry out an audit of your arrangements and advise regarding the calculation of holiday pay. We will identify whether or not your current arrangements are in accordance with the Working Time Regulations (or, where applicable, the Agricultural Wages Order) or otherwise the Directive, and indeed your contracts of employment, and make recommendations to reduce or, if possible, avoid future and historical holiday pay liabilities. To the extent you will incur additional costs in order to comply with your current statutory and contractual obligations, we will also make recommendations regarding minimising and/or off-setting those costs, and with regard to the potential to reverse any increases in holiday pay if future changes in the law, or the way the courts interpret the law, so permit.

For more information about a fixed price audit or otherwise advise relating to holiday pay, please contact me on (T: 01952 211 010; email john.merry@lblaw.co.uk), Chris Piggott (T: 01952 211011; email chris.piggott@lblaw.co.uk) or Will Morse (T: 01432 377152; email will.morse@lblaw.co.uk)