The Employment Appeal Tribunal has handed down judgment in Bear Scotland v Fulton.
The EAT concluded that overtime has to be included when calculating holiday pay. They also confirmed that employees who have been underpaid can make back dated claims which could stretch back as far as 1998 (when the Working Time Regulations were introduced).
Where overtime is often worked, the potential liabilities for employers will be substantial. However, there are two mitigating factors. First, this principle only applies to the basic 4 weeks’ holiday under the Working Time Directive, not the additional 1.6 weeks under the Working Time Regulations. An employee can only therefore claim that they have been underpaid in respect of up to 4 weeks’ holiday per year.
Second, an employee can only make a claim within 3 months of the most recent underpayment. In making back dated claims, if there has been a break of more than three months between successive underpayments a tribunal will not award compensation for any under payment prior to that break.
The Employment Appeal Tribunal gave permission to appeal to the Court of Appeal but, given European case law, it is unlikely that any appeal will succeed.
The government have said that they are setting up a task force to limit the impact of this decision but, since it is based on European law, there is very little they can do.
Next year a similar case is being heard relating to commission, which is likely to reach the same conclusion.
The bottom line is that an employee should not be financially disadvantaged by taking holiday. They should therefore be paid all of the payments that they would have received had they been at work, including overtime, attendance allowance, shift allowance, bonus, commission etc. Where a payment will not be affected by an employee taking holiday (such as an annual bonus based on company performance) that does not need to be taken into account because an employee will still get it irrespective of their holiday.
Our advice is therefore to review your holiday pay arrangements immediately so that all appropriate payments are taken into account. (Although the case did not make the method of calculation clear, the best approach will be to take a 12 week average of the employees’ earnings prior to the period of holiday.) That will ensure that the problem does not get any greater. It will also start the clocking ticking so that an employee who has been underpaid will have three months from the last under payment of holiday to bring their claim.
You could, if you wished, only incorporate the additional payments when calculating 4 weeks’ holiday per year. That will save you some money but will mean that you have to operate a complex system to calculate holiday pay using two different methods.
If you receive any requests from employees for back dated holiday pay, those should be looked at on a case by case basis, bearing in mind the point that a three month gap between under payments will break the series.
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