Court decision likely to have significant impact on how employers calculate holiday pay. The recent decision in Bear Scotland, Hertel (UK) Ltd and Amec Group Ltd v Fulton and others, handed down by the Employment Appeal Tribunal on 4 November 2014, has been widely publicised. It is likely to have considerable cost implications for employers.
In the past, an employee’s holiday pay has always been based on his or her basic pay, and in calculating the rate payable the employer only took into account overtime which the employee was contractually required to work. This contrasted with the treatment of casual or agency staff, where holiday pay has always been calculated on the basis of the hours actually worked, or an average of them. Scope of ruling There is some uncertainty about the scope of this ruling, but it does seem absolutely clear that it includes only overtime which is intrinsically linked to the employee’s normal role, rather than special or unusual duties different from those s/he normally performs.
However, there is still some uncertainty about exactly which type of overtime is to be included in the calculation.
Hertel concerns only ‘non-guaranteed’ overtime, where the employer was not obliged to offer it, but when required, the claimants had to work it. What is not clear is whether truly voluntary overtime should also be taken into account, even if it is worked very regularly. Langstaff J states clearly that holiday pay should now be ‘comparable to periods of work’ and the general view (including that of ACAS) seems to be that where overtime is regularly worked as a matter of fact, then the averaging exercise should be carried out in the calculation of pay for holidays. There is a further complication in that this ruling only applies to the first four weeks (20 days) of holiday taken in any holiday year, whereas the additional 1.6 weeks (8 days) and any additional contractual entitlement can still be calculated using basic pay only.
Retrospective claims One major concern for employers is how far back employees might be able to go in claiming unpaid holiday. The court’s decision is quite favourable in that respect, with the judge stating that ‘any series punctuated from the next succeeding series by a gap of more than three months is one in respect of which the passage of time has extinguished the jurisdiction to consider a complaint that it was unpaid’. Since it is taken that the employee takes his or her statutory four weeks first as the year progresses, and then the additional UK holidays of 1.6 weeks, and then any additional leave, then it is likely that claims in respect of the earlier part of the year will be extinguished by at least one three month gap which then breaks the continuity. The likelihood is that the absolute maximum claim that might be available to any employee is in respect of the current holiday year.
What should employers do now? Employers are asking what they should do in relation to this ruling. The judge gave permission for the parties to appeal, so this will probably not be the end of the story, but pending this there are a number of possibilities. Employers might decide to do nothing, and take the risk of backdated claims, although given the wide publicity accorded to the ruling, employees might be unhappy about that.
On the other hand, they might decide to recognise the ruling by paying the same rate averaging over 12 weeks to include either non-guaranteed overtime only or including all overtime, even if it is voluntary.
Employers could adopt a ‘two tier approach’, paying 20 days at the higher rate and the rest at the basic rate, or keep the same rate for all holiday. In order to minimise exposure in future, employers might seek to review their contracts and amend them to ensure that overtime is truly voluntary, might limit or refuse holidays after periods when a lot of overtime has been worked, or could use agency or bank workers to fill the gaps rather than allowing permanent staff to work overtime. It is to be hoped that Parliament might intervene to clarify the situation, in everyone’s interests!