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Calculating holiday payCalculating holiday pay

» Posted on: 5 November 2014

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On Tuesday of this week, the Employment Appeal Tribunal handed down its judgment in Bear Scotland v Fulton (and related cases).

Immediately following the ruling, Business Secretary, Vince Cable, announced plans to set up a new business task force to assess its impact. The members of the task force consist of seven employers’ organisations but, as far as we are aware, do not include any employee organisations or unions.

The EAT has held that Article 7 of the Working Time Directive is to be interpreted so that payments for overtime which employees were required to work, though which their employers were not obliged to offer as a minimum, should nevertheless form part of the normal remuneration and be included as such in the calculation of holiday pay under Regulation 13 of the Working Time Regulations 1998.

Other key points:-

  • The ruling applies only to the basic four weeks’ statutory leave that was granted under the Working Time Directive and not the additional 1.6 weeks that was incorporated under Regulation 13A of the Working Time Regulations when it was amended on 1 October 2007;
  • Claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments. The impact of this will need to be considered carefully and we anticipate many challenges in this area given that the limitation point will still nevertheless be subject to the reasonably practicable test.
  • Travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, must also be considered when reflecting and calculating holiday pay.

The EAT has refused to grant a reference to the Court of Justice of the European Union but has given permission for an appeal to the Court of Appeal and we await the outcome with interest.

Inevitably, employers who may be affected by this decision are going to want to decide how to react to it, all be it that an appeal is probably inevitable and the outcome of which is currently unknown. It seems to us that a sensible way to proceed would be, from this point forward, to include non-guaranteed overtime and other variable elements of pay (intrinsically related to work) within the calculation of an average week’s pay for the future holiday payments (up to a maximum of four weeks in any holiday year). By following this approach, it is likely, though not guaranteed, to break any series of deductions that might have been established over time and, if no claims are received from employees within the next six to nine months, the risk of having to defend a successful claim for backdated holiday pay will have significantly diminished. The alternative approach of doing nothing or waiting to see if any claims are issued against the business may be favoured by others, but not by us.

If you believe that your business has, or may have, a real risk of claims for backdated holiday pay, please get in touch.

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