The Employment Appeal Tribunal’s landmark decision on holiday pay is unlikely to be the final word on the subject.

The recent judgment of the Employment Appeal Tribunal (EAT) in three joined cases concerning the calculation of holiday pay has attracted widespread publicity (Bear Scotland Ltd v Fulton and other cases, 4 November 2014).

In essence, the EAT has held that where workers are required to work overtime when requested by their employer, this should be factored into holiday pay for their minimum four-week annual leave entitlement under EU law. On the plus side for employers, however, the EAT restricted the scope for workers to pursue backdated claims for arrears of holiday pay.

How did the cases arise?

The cases before the EAT addressed a conflict between UK and European law as to how holiday pay should be calculated. EU law provides that workers have the right to at least four weeks’ paid annual leave, but does not say how holiday pay should be assessed. However, the European Court of Justice has ruled holiday pay should be based on ‘normal remuneration’, including any payments linked intrinsically to the performance of the worker’s tasks (Williams v British Airways plc [2011] IRLR 948).

The relevant EU directive is implemented in the UK by the Working Time Regulations 1998 (WTR), under which workers are entitled to the minimum four weeks’ annual leave plus an additional 1.6 weeks. Such holiday is paid in line with the general employment law rules on calculating a ‘week’s pay’, so that holiday pay for employees who have ‘normal working hours’ is based on basic pay only, excluding other payments such as overtime and commission.

In the last couple of years, there have been several employment tribunal decisions allowing holiday pay claims on the basis that the workers were not receiving their full entitlement for their four-week EU annual leave entitlement, in breach of EU law.

What did the EAT decide?

Applying the principle of normal remuneration, the EAT decided that the overtime payments in question in the appeals were intrinsically linked to performance of the tasks required under the workers’ contracts, so must be taken into account in calculating EU holiday pay. The EAT also decided that the relevant provisions of the WTR could be interpreted to be in line with EU law on this issue so as to ensure overtime was not excluded. 

This only applies to the minimum four-week EU entitlement and not to the additional 1.6 weeks’ leave provided under the WTR (or indeed any contractual holiday on top of that). The EAT’s judgment leaves the position on voluntary overtime unclear. 

The EAT also accepted that certain allowances relating to travel were intrinsically linked to the performance of tasks under the contract and therefore amounted to normal remuneration. It determined that, on the facts, the allowances related to time spent travelling rather than to travelling costs. The EAT also appeared to accept that decisions at employment tribunal level that certain other payments (such as standby and acting-up supplements) were part of normal remuneration.

What is the position on retrospective claims?

Some of the previous tribunal decisions appeared to open up the possibility of workers claiming for holiday pay underpayments going as far back as 1998 (when the WTR came into force) or the start of their employment if later. Many employers have been concerned about potentially costly claims stretching back many years. 

The EAT has now decided, however, that claims alleging underpayment of holiday pay will be time barred if there was a break of at least three months between successive underpayments. A gap of more than three months means there can be no ‘series of deductions’ from holiday pay, so tribunals will not have jurisdiction to hear such claims. 

Further, the EAT appears to say that workers take the four-week EU holiday entitlement first in any leave year, followed by the additional 1.6 weeks’ UK leave. The significance is that the latter should break a series of deductions because it will have been paid correctly (as there is no requirement to include overtime).

What happens next?

It is possible there could be an appeal to the Court of Appeal (by the employers) against the interpretation of the WTR such that holiday pay includes overtime, although the EAT expressed the view that it would not have a reasonable prospect of success.

The parts of the EAT’s judgment restricting the scope for backdated claims are also very likely to be appealed (by the employees). So while these aspects of the ruling are comforting for employers, the EAT’s word is unlikely to be the last on the subject. There is still an ongoing risk of employers facing retrospective claims relating to previous periods of annual leave.

How should employers respond?

Clearly, the questions hovering over calculation of holiday pay are unlikely to be conclusively resolved any time soon. This applies not just to overtime, but other types of payments such as commission (on which there is a separate case pending). It may therefore be premature for many businesses to be changing their holiday pay arrangements or entering into negotiations about backdated compensation for employees.

Employers would, however, be well advised to undertake a careful audit of their current arrangements to establish any financial exposure, factoring in the EAT’s ruling. 

They may also decide to place a reserve in their accounts in relation to potential liabilities and start considering how they might absorb future increased costs associated with holiday pay, for example by changing working practices.

Emma Perera is a partner in the employment, reward and incentives department at Lewis Silkin LLP