Background

As you are probably aware, there have been a number of cases over the years on the issue of what an employee should be paid when they take holiday.  Many of the issues stem from the differences between the EU directive on Working Time and the UK legislation. The EU directive guarantees a minimum of 4 weeks paid holiday for all workers. The UK legislation now provides for 5.6 weeks. Furthermore, how holiday pay should be calculated differs depending on whether you are a worker with “normal” working hours or variable working hours each week.

Earlier this year, the case of Lock v British Gas decided that holiday pay should include commission, but left unanswered questions around how to calculate such holiday pay.

Earlier this week, the Employment Appeal Tribunal (EAT) gave its judgment in another significant case on holiday pay and specifically whether holiday pay should include overtime and travel time payments (Hertel (UK) Ltd v Woods, Bear Scotland Ltd v Fulton and Amec Group Ltd v Law).

Case law implications

The main implications are as follows:

1. When calculating holiday pay, employers have to pay workers a sum to reflect normal guaranteed or non-guaranteed overtime which is normal pay;
2. Where employers make taxable payments for travel time as part of a worker’s normal pay, these also have to be included in holiday pay calculations;
3. This only applies to the 4 weeks’ leave granted under European law – not the additional 1.6 week’s granted under UK law, or any contractual enhancements;
4. Claims for arrears of holiday pay will be out of time if there has been a break of more than 3 months between underpayments, or more than 3 months from the last/only underpayment until the time that the claim is brought. This is a very grey area and the EAT flagged that this is the area that is most likely to be successfully challenged on appeal. There may also be other claims that workers could bring that would mean that underpayments going back over a much longer period could be challenged.

Continuing Uncertainty

There are lots of unanswered questions that were not directly addressed in the EAT’s decision including:-

• the frequency of overtime payments in order to be regarded as “normal pay”
• how far back employees can claim
• what happens if the employee can refuse overtime if offered
• what reference period should be used to calculate holiday pay

Next steps

We understand that the government has set up a taskforce to investigate the implications of this case. Whilst the EAT case is unlikely to be the final word on the matter (we understand that appeals are pending), at present this EAT decision constitutes the law, and is binding on employment tribunals and therefore creates potential liability for employers now. Employers who pay overtime need to decide what they are going to do in light of the findings, namely whether to change the way holiday pay is calculated (and if so for which type of holiday and how) or to wait for the outcome of any further appeals. If employers decide to wait for further guidance they may be well advised to allocate a budget now to meet any future claims.

If you would like to discuss this further, please do get in touch.