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Holiday pay – navigating the aftermath of the EAT’s decision

Print publication

16/01/2015

The Employment Appeal Tribunal’s (EAT) landmark decision in Bear Scotland v Fulton and others [UKEAT/0047/13] has been at the top of many HR agendas. As a reminder, the EAT held:

  • Non-guaranteed overtime should be taken into account when calculating holiday pay under the 4 weeks’ statutory leave provided by the Working Time Directive (WTD) (this is sometimes referred to as ‘Euro Leave’). This does not apply to the additional 1.6 weeks’ leave provided by Regulation 13A of the Working Time Regulations (WTR).
  • Where a period of 3 months has elapsed between the deductions (i.e. the underpaid holiday pay) there will be a break in the series of deductions meaning that the worker cannot claim for underpayment beyond the last deduction in the series.
  • Payments for travel time or other supplementary payments which are ‘intrinsically linked’ to the worker’s contractual tasks will count as ‘normal remuneration’ for the purposes of Article 7 of the WTD and the WTR must be interpreted accordingly. This means that such payments may also need to be factored into holiday pay for the 4 weeks’ ‘Euro Leave’.

Unite (the Union that represented many of the employees) confirmed, shortly after the decision, that it would not be appealing.

The Government has subsequently introduced regulations to impose a 2-year limitation on unlawful deductions from wages claims (including holiday pay claims) to limit the impact of the Bear Scotland decision. The draft regulations will apply to claims presented on or after 1 July 2015 so eligible claimants will still be able to make back-payment claims for more than 2 years up to that date. The draft regulations also make it clear that the right to paid holiday is not implied or incorporated into contracts of employment thus ruling out any potential breach of contract claims for non-payment of holiday.

Employers now need to make decisions about how to calculate holiday pay going forward and how to address any back payment claims. Our employment team has been analysing the effect of the decision. Key points to consider include:

  • The implications of the decision may seem difficult to grapple with at first especially for those employers who have large numbers of affected employees. It is important not to panic. There may be pressure from unions or employee representatives to make immediate compensatory payments but a considered response will only be possible after a full audit and assessment of actual exposure and options going forward.
  • The decision will impact each employer differently. There is no ‘one size fits all’ solution because there will be a different set of facts in each case. Employers will need a reasonable amount of time to decide on the next steps.
  • We recommend that an audit is carried out. This will involve a full assessment of exposure and risk of claims including looking at which categories of employees are affected, where any underpayments may have occurred, how far back potential claims may go (bearing in mind the Government’s announcement referred to above) and how to achieve compliance going forward.
  • Once this audit is complete the employer will have a clearer picture enabling it to decide what steps, if any, can be taken to mitigate or minimise potential exposure.
    It may be that there is a cost argument to look at changing existing overtime arrangements. This might include limiting or abolishing overtime or looking at using agency workers to assist with peaks of work. Where overtime is worked regularly each week it may make sense to reflect this in normal working hours rather than classing it as overtime. Bear in mind that changes to existing working practices will require appropriate consultation to avoid the risk of claims.
  • Consider whether existing payroll systems are adequate to administer holiday pay in compliance with the EAT’s decision. Some technical tweaks or new software may be needed.
  • A decision will need to be made on whether to make a distinction between the 4 weeks’ ‘Euro Leave’ and the 1.6 weeks’ additional WTR leave. Whilst it will be lawful to do so the administrative/logistical costs of drawing the distinction may outweigh the benefits.
  • Remember that the WTR apply to ‘workers’ and not just employees so don’t forget to factor agency workers and other ‘off-payroll’ staff into the audit.
  • Don’t overlook the fact that certain bonus payments might fall within the definition of ‘normal remuneration’ and may, therefore, need to be factored into holiday pay.
    If commission, bonus or overtime payments tend to be made at the same point in each year it may be worth considering what can be done to minimise the effect of workers gaining a ‘windfall’ in their holiday pay which is unrepresentative of their pay over the entire year. This might include looking at changing rules on taking holiday at certain times of the year.
  • Businesses with workers who have transferred in under TUPE will be keen to assess what holiday pay data is held for such individuals. Indemnities given by the transferor at the time of transfer may be helpful in the event of any claims.
    Above all, don’t do all this hard work only to score an ‘own goal’. It is essential that the audit is conducted in such a way that it could not be the subject of an ‘order for disclosure’ in any future legal proceedings against the employer. This can be achieved by making sure that the audit is ‘legally privileged’ by conducting it via legal advisors.

Our employment team has been busy advising a range of employers on the practical impact of the decision and assisting with risk and exposure audits. If you would like to discuss any of the issues or simply obtain an initial view please contact any of the team.

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