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Media Briefing Note: No Pain, No Gain - Holiday Pay Ruling Gives Rise to Additional Costs but Relief in Respect of Previous Years

04 November 2014

4 November 2014 - The Employment Appeal Tribunal (EAT) has today reached its decision in Bear Scotland Ltd v Fulton and other linked cases. The cases deal with how holiday pay should be calculated and is particularly significant because of the potential financial impact on employers.

The case confirms that UK rules on the calculation of statutory holiday pay must be interpreted to include non-guaranteed overtime normally worked by the employee. Until now, many employers have paid employees their basic rate of pay during periods of holiday, even if employees normally work overtime. This means that pay during holiday can be substantially less than the pay the employee receives while they are at work.

The EAT has ruled that the provisions of the Working Time Regulations that allow holiday pay to be calculated on the basis of basic pay only are not compatible with earlier rulings of the European Court of Justice (ECJ). Holiday pay must reflect the pay an employee would typically be receiving were he or she at work, to ensure that employees are incentivised to take their holiday entitlement. The ECJ regards it as a particularly important principle of EU social law that employees should not be deterred from exercising their right to paid annual leave.

However, the EAT decision removes the risk of claims for underpaid holiday stretching back to 1998, which was a potentially massive exposure for employers. The way the EAT has interpreted the time limits that govern when a claim can be brought means that claims are only likely to be possible in relation to the current holiday year.

Commenting on the ruling, Chris Wellham, Of Counsel in Hogan Lovells employment team, said:

"The EAT ruling, while not unexpected in light of the ECJ cases, is nonetheless a headache for employers going forward given the increased holiday pay liability for businesses with an overtime based workforce.

"However, employers will be breathing a huge sigh of relief because the risk of claims for underpaid holiday going back to 1998 seems to have receded as a result of the decision. Although employees who work non-guaranteed overtime will be entitled to greater holiday pay in future, the real concern for business was uncertainty about how to quantify the potential exposure for back claims. The EAT's decision will make it much more difficult for back claims of this sort to be brought."

Background

The Working Time Directive was implemented by the Working Time Regulations in 1998, which state that workers should be paid a “week’s pay” for each week of leave calculated in accordance with the Employment Rights Act 1996.

They do not, however, specify precisely how pay for EU statutory holiday leave should be determined. Previous EAT and Court of Appeal cases had held that holiday pay can be calculated using a worker's basic rate of pay, excluding other payments such as commission, non-guaranteed overtime or other allowances, even if such payments are received regularly and represent a significant enhancement to an employee's basic pay. The result is that an employee may receive lower pay during a period of holiday than would be the case had they been at work.

However, a number of recent European Court of Justice decisions suggested that the way holiday pay is currently calculated under the Working Time Regulations is not compatible with the Working Time Directive.

These cases centre on the fact that the right to holiday is a particularly important principle of EU social law. To ensure that workers are not discouraged from taking their holiday entitlement, these cases have ruled that holiday pay should reflect a worker's "normal remuneration", including all components that are "intrinsically linked" to the performance of tasks under the contract, or which reflect a worker's personal or professional status.

The EAT decision provides greater clarity on what has been an issue of considerable concern and uncertainty for many employers – albeit at potentially significant financial cost.

 
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