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You can hardly have missed the media hype that has surrounded the recent decision of the Employment Appeal Tribunal (EAT) in the case of Bear Scotland v Fulton, which was handed down earlier this week.

In an attempt to provide some clarity on the matter, we've set out below the main implications of the decision and what this means for employers.

Background

The dispute concerns the calculation of holiday pay and whether, instead of using basic pay as the sole
basis for the calculation, employers should instead use an average calculation of workers' earnings, taking into account additional payments such as overtime and commission.

Following a series of judgments by both the Employment Tribunal and European Court of Justice (ECJ), it is already established UK law that workers should receive their "normal remuneration" for periods of annual leave which include all elements of pay "intrinsically linked to the performance of tasks".

Also established is that any guaranteed contractual overtime and commission payments that an employee earns, or would have earned had they not taken annual leave, should be included in the calculation of holiday pay. The rationale for this is that workers taking statutory annual leave should be put in a comparable position to periods when they are working as any financial disadvantage could deter employees from taking their annual leave entitlement.

What was the decision in Bear Scotland v Fulton?

This case concerned the calculation of holiday pay of workers in the highways and construction sectors. The Court had to determine whether pay for non-guaranteed overtime (i.e. overtime which the employer did not have to offer but the employee did have to work if offered) is "intrinsically linked to the performance of tasks" and should be included in the calculation of holiday pay.

The EAT decided that:

· the Working Time Directive (WTD) requires payments for non-guaranteed overtime to be included in holiday pay;

· the Working Time Regulations 1998 (WTR), which implement the principles of WTD under UK law, can be interpreted as allowing such payments to be included in holiday pay; but

· the payment relates only to the 20 days' holiday granted under the WTD rather than the 28 days required under the WTR.

Significantly, the EAT also found that:

· any claim for deductions where the next deduction is separated from the last by a gap of 3 months or more will (subject to certain rules on extensions to time limits) be out of time; and

· the 8 days of "additional leave" from which UK workers benefit under the WTR (in excess of the 20 days required under the WTD) are considered to be the last days of holiday to be taken in the leave year.

Although the decision in Bear Scotland v Fulton is likely to mean higher wage bills for UK employers in future, it will be of some comfort that the Court has taken steps to limit the scope of retrospective claims by workers for backdated holiday pay.

So what does this judgment mean in practice? By way of an example, if an employee takes a week's holiday in January (and is underpaid in respect of that holiday) then does not take any further holiday for more than 3 months, any claim for an underpayment of holiday based on a series of deductions will be out of time in respect of the January underpayment. Moreover, it is likely that there will have been a substantial gap at the end of any given leave year
when there were no unlawful deductions from wages (because only the 8 additional leave days were taken). This would be sufficient to break the 'series' of deductions required for a pay claim.

Employees will still be within time to bring claims for underpayments that have occurred in the last 3 months (as has always been the case), but not, it would seem, as far back as 1998. Further, in order for there to be a valid holiday pay claim at all, the employee would have needed to have earned commission/overtime in the weeks immediately preceding a period of annual leave.

Following this decision, the position now is that many historic holiday pay claims may, in practice, be limited to the most recent leave year. However, the residing EAT Judge is already predicting a legal challenge to the Court of Appeal on this specific point given its significant public importance.

What are the implications for employers?

· Overtime (whether guaranteed or not) must be included when calculating holiday pay and, although the decision may be appealed, this element of the decision is almost certainly here to stay.

· Unhelpfully, there is still uncertainty over the appropriate reference period for the calculation of holiday pay in respect of average overtime worked.

· Although recent decisions confirmed that commission must be included in holiday pay, we are still awaiting guidance from the UK Courts on what a compliant commission scheme might look like and what calculation method is appropriate. What is clear is that commission, bonuses and overtime cannot be considered to already include an element of holiday pay.

What should employers do now?

· You could do nothing and see whether any claims are brought. These are likely to be stayed pending the conclusion of any further legal challenge.

· You should in any event assess your payroll and HR records to examine your possible exposure to holiday pay claims (remember – although this ruling limits the scope for backdated claims it is likely to be subject to further appeal).

· Consider the benefit of making any back payments now, in order to break the chain in the series of deductions (albeit that this has an immediate cost to the business).

· You may wish to factor in the additional cost of holiday pay when determining future discretionary payments to your staff (such as pay rises or bonuses) or review your existing use of overtime.

· Remember that the inclusion of overtime and commission only relates to the first 4 weeks of annual leave each year, not the additional 1.6 weeks (or 8 days) provided for under UK law. This means that the two portions of annual leave can be paid at different rates. You may decide however, that the administrative headache of doing so outweighs any saving you will make by not including overtime in the holiday pay for the additional 1.6 weeks.

· You should review your current policies to verify how they align with this ruling and determine whether any changes are needed to ensure future compliance. Whatever the outcome of any future legal challenges on this subject, it is likely that overtime payments will remain elements to be factored into the calculation of holiday pay.

Final thoughts

In light of the decision in Bear Scotland v Fulton, the government has launched a task force to evaluate the impact of the decision on UK businesses, so watch this space! One thing is clear though and that is that the calculation of holiday pay is no mean feat.

To discuss the cases in more detail or for advice which is more tailored to your situation, please feel free to Contact one of our team.