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5th November 2014

New Regulations on Calculating Holiday Pay

Following yesterday’s judgement of the Employment Appeal Tribunal (“EAT”) in Bear Scotland Limited & Others v Fulton & Others, we are sending this email to all our retained clients.

The EAT has held that overtime payments should form part of an employee’s holiday pay calculation where the overtime was regularly worked. If there is a settled pattern of working, the overtime payments will form part of a week’s pay for the employee. If there is no settled pattern of working, yet overtime is still regularly worked by the employee, an average has to be taken over a 13 week period to calculate a week’s pay for the purposes of calculating holiday pay.

The EAT also held that this was the correct interpretation of the law even if overtime was not guaranteed in contract by the employer. As long as the employee was obliged to work regular overtime, that was sufficient. In reality, we consider that the fact of the employee working overtime is likely to be sufficient.

What does this mean?

Every worker has the right to 5.6 weeks holiday each holiday year. A week’s pay (and therefore each day’s pay) will now have to be calculated on an employee’s actual income, including overtime, if that employee regularly works over and above their contracted hours and is in receipt of pay for doing so.  You will therefore need to work out what an employee’s weekly and daily pay is for the purposes of calculating how much an employee should receive as holiday pay when he or she takes annual leave. Strictly speaking, the new calculations only apply to the first 4 weeks of annual leave taken as this is the EU minimum requirement, however, employers may wish to consider the benefits of applying the new rules to an employee’s full entitlement.

Appeal

It is likely there will be an appeal, but in our view it is highly unlikely that the appeal will be successful. The EAT has interpreted the EU Directives correctly, in our opinion, and the judgement closely follows others on this point. It is highly likely that this will become settled law so it is important that you take steps to comply as soon as possible.

Claims for Holiday Pay

Although the EAT has ruled that claims for deductions from wages are limited to 3 months back pay only, it is unlikely that the civil courts would rule in the same way for simple breach of contract cases claiming back over 6 years for the same amounts. This may mean exposure in the civil justice system to claims from all eligible employees dating back 6 years. Please be aware that this may well affect your business.

Steps to Take

It may be advisable to undertake the following:

  1. A full audit of the different payments your employees are paid (e.g. commission, voluntary overtime, non-voluntary overtime, shift allowances and other pay) paid to all employees and workers in all parts of the business.
  2. A review of your contracts of employment, and staff handbooks to check that they accurately reflect how holiday pay is calculated after this judgement.
  3. A review of the workforce demographic and look at holiday patterns amongst employees as well as how much overtime your employees have worked- this may help identify how long potential liabilities might go back for.
  4. Seek legal advice if you receive a claim for back pay or are likely to do so.

 Lewis Hymanson Small Solicitors LLP on behalf Lighthouse Risk Services

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