Guidance Re Holiday Pay Ruling
The Decision
As you are likely to be aware, the Employment Appeal Tribunal (EAT) recently handed down its decision in Bear Scotland v Fulton: the EAT confirmed that all elements of a worker’s normal pay, including non-guaranteed overtime, must be taken into account when calculating holiday pay under EU law. However, in a new development, the EAT also ruled that if there is a gap of more than three months between any two deductions in the chain, the ‘series’ of deductions is broken. This is welcome news for employers who were concerned at the risk of facing claims for holiday pay going back a number of years.
What does this mean for your business?
If any of your employees regularly undertake overtime they will be entitled to have their overtime included when they receive holiday pay. Under the old system, if an employee was contracted for 40 hours per week but normally worked 45 hours per week, that employee would only be paid for 40 for each week of holiday. Under the new system that same employee will entitled to be paid for up to 45 hours for each week of holiday.
Our advice is for employers to establish a system for including overtime in holiday pay calculations as quickly as possible. The EAT did not give any guidance as to how the calculation should be performed, so it will be down to individual employers to decide how they are going to implement a new system.
The first issue to decide is what reference period you are going to use to calculate “normal pay”. There are advantages and disadvantages to each option, but broadly speaking, we recommend that you select one of the following three options:
- Base the calculation on the previous 12 weeks
- Base the calculation on the previous 3 months
- Base the calculation on the previous year
Our advice is for employers to establish a system for including overtime in holiday pay calculations as quickly as possible. The EAT did not give any guidance as to how the calculation should be performed, so it will be down to individual employers to decide how they are going to implement a new system.The first issue to decide is what reference period you are going to use to calculate “normal pay”. There are advantages and disadvantages to each option, but broadly speaking, we recommend that you select one of the following three options
Strictly speaking, this ruling only applies to the first four weeks’ holiday each year, which is the legal minimum under European law. For full-timers, that means the first 20 days holiday per year including bank holidays. In the UK, under the Working Time Regulations, the minimum is 5.6 weeks, or 28 days for a full-timer (20 days plus bank holidays).An employer is only obliged to pay “normal” or average holiday pay during those first 20 days. So, once you have decided on the reference period, you then need to decide whether you want to pay the extra amount for those first 20 days or for the whole year.
In most cases, the saving will not be worth the additional burden of the more complicated calculation, and it is difficult to explain to staff why they get their full holiday pay for most of the year and then just their basic amount later. But if your contract is more generous than the Working Time Regulations - if for example you give staff 25 or even 30 days a year plus bank holidays - it may be better to be upfront about the reasons and do the calculations.This is a surprisingly complicated area, please fell free to call us and discuss the implications for your business.Using the example above, the employee in question would be entitled to 40 hours holiday pay plus either an additional 5 hours per week or an additional 3.57 hours.It is worth noting that the EAT’s decision was based on non-guaranteed overtime – that was overtime that was not guaranteed but that the employees were contractually obliged to undertake when offered.
Technically speaking there is no ruling on voluntary overtime but this is a fine line and you would need to look at your employee’s contract of employment and what actually occurs if you were considering differentiating between the two. For example, if overtime is described as voluntary in the contract, but the reality is that your employees are expected to help out and complete overtime, does this render the overtime compulsory?
Should you pay back pay?
During December 2014 the government introduced the Deduction from Wages (Limitation) Regulations 2014 which limited claims for back pay to two years from the date a claim is submitted. In these circumstances the maximum potential claim is limited to a calculation based on the previous two years, but the reality is that in the vast majority of cases the series of deductions will have been breached at some point and an employee will not be able to claim for the full two years. If an employee suggests that they are entitled to back pay, you should ask them to confirm which period this relates to and then pick up the phone and take some advice.James TwinePartner, Solicitor, Head of the Employment TeamTel: