Holiday Pay & Overtime

The Employment Appeal Tribunal has handed down its decision in the holiday pay case of Bear Scotland Ltd v Fulton, which has attracted a great deal of media coverage. The main issue in the case was whether the Working Time Regulations had to be interpreted so that pay for “non-guaranteed” overtime has to be included in the calculation of holiday pay. “Non-guaranteed” overtime is where the employer does not have to offer overtime. In the cases in front of the EAT the overtime was compulsory, i.e. the employee had to undertake it if asked, but voluntary overtime, where the employee is under no obligation to work overtime but does so from choice, is also “non-guaranteed”.

The EAT held that pay for such overtime, if it is so regularly required by the employer and undertaken by the employee as to make payments in respect of it ‘normal’, must be included in the calculation of holiday pay. So in the cases before the EAT, where the employees had contractual hours of 38 per week but regularly worked 6 hours of overtime each week, pay for all the hours worked had to be included in the calculation.

However, this ruling only applies to the 4 weeks of annual leave provided for by the Working Time Directive. It does not apply to the 1.6 weeks of additional leave granted by the Working Time Regulations.

This has important implications. A major fear for employers was that employees would be able to claim for underpaid holiday pay going back to when they started their job or 1998, when the Working Time Regulations came in, whichever was later. However, the EAT has ruled that wherever there is a gap of more than three months between two instances of underpaid holiday, that will break the series of underpayments that can be claimed for.

The effect of the EAT’s ruling is that weeks 5 and 6 of an employee’s annual leave entitlement can be paid at basic rates and so, if they are, there will be no underpayment. Therefore, if there is a gap of more than three months between the last pay date in respect of the employee’s first four weeks of annual leave in the last holiday year and the pay date in respect of the first day of leave in the current holiday year, that will stop the employee claiming back pay for any period earlier than the start of the current holiday year.

The EAT did not explicitly discuss the issue of voluntary overtime. However, it seems the issue there will turn on whether the employee does it so regularly that payment for it is a normal part of their weekly or monthly pay.

Sadly, this is not the end of the story. Although this ruling is binding on employers now, it will be appealed to the Court of Appeal.

The decision as to whether commission and bonuses need to be included in holiday calculations is yet to be decided by the higher courts but it looks like the answer will be ‘yes’ if they are a normal part of the weekly or monthly pay.

Steps You Can Take Now

As things stand, it appears almost certain that in the future holiday pay will need to include overtime and commission if they are a normal part of the ‘pay packet’. Other sums such as bonuses, call-out payments and shift allowances may also need to be included if they are a normal, regular component of pay.

Businesses should conduct an audit of pay arrangements identifying all different payments paid to workers in the course of their employment including overtime, commission, shift allowances, productivity, performance and attendance bonuses, standby and emergency call-out payments. If they do not currently form part of holiday pay, you should consider whether these are a regular, normal feature of employees’ pay or only paid ad hoc, from time to time. If you seek our advice in relation to these issues legal privilege may attach to your audit.

Even if you decide not to act now and choose to wait until the higher appeal courts look at the matter (or a worker sues you), you should consider building up a reserve to deal with the likelihood of successful claims in the future.