Landmark decision on Holiday Pay

Posted 05/11/2014

Over recent years, employers have faced a number of issues in relation to workers’ holiday in terms of how it should be paid, whether it should be paid to employees on long term sick leave and what it is made up of.

The Employment Appeal Tribunal yesterday made an important decision in relation to holiday pay in the case of Bear Scotland v Fulton (and other cases).  It decided that workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments.  Non-guaranteed overtime means overtime that an employer is not contractually bound to offer to a worker but when they do offer overtime the worker is obliged to do it.  For example, the contract could state that a worker has to be available to work overtime on the weekends, if needed by the employer.

Whether this decision applies to voluntary overtime is arguable. Voluntary overtime means overtime that an employer has an absolute discretion whether to offer and, when they do, the worker can decline to do it.

This decision, along with previous decisions of the courts on holiday, has stressed that the right of workers to take holidays is very important and nothing should prevent a worker from taking his or her holiday.

Employees are entitled to a minimum of 5.6 weeks paid holiday per year at the rate of a week’s pay for each week of leave. This is calculated in accordance with the “week’s pay” rules set out in statute. However, what is included within this has recently come under scrutiny and is likely to be one of the biggest employment law issues of 2014-15 as its implications are potentially far reaching. Where a worker has normal working hours, should they just be paid their basic salary or should this also include other elements such as overtime and commission? It had previously been decided that only overtime that was guaranteed and that the worker is required to carry out under his or her contract could be included. It has also been decided that commission which is “intrinsically linked” to the performance of tasks that a worker is required to carry out should be included when calculating holiday pay in respect of statutory holiday periods. The reasoning for this is that if you ignore commission then the worker will be at a disadvantage if they take holiday because they will miss out on earning commission during that holiday period, which will see them lose out financially later on. This could be a disincentive to a worker taking much needed rest on a period of holiday. This is in line with the objective of the Working Time Directive to protect the safety and health of workers.

Employers could be faced with claims from workers that payments for holiday already taken should have, but did not, include for example commission and overtime. Such claims can be brought as a deductions from wages claim and there is a risk that such a claim can go back as far as 1 October 1998, the date that the Working Time Regulations came into force. However, it was decided in the case yesterday that if there is a break of more than three months between successive underpayments, claims for arrears of holiday pay are extremely likely to be out of time.  It will therefore be a judgement call for employers to decide at what point or if at all to change their policy in relation to holiday pay.  If an employer changes its holiday pay calculations going forward, this may have large costs associated with it and also highlights the issue to employees once they realise that a new approach is being taken.

In relation to agricultural workers, businesses will need to consider carefully whether those that they are engaging are entitled to paid holiday because they are a “worker” and if so, how much holiday pay those “workers” are entitled to.

For more information please contact our Employment Team.