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Employment ruling on holiday pay could be costly for all business owners

04 November 2014

The Employment Appeal Tribunal has today (Tuesday 4 November 2014) ruled in Bear Scotland v Fulton that overtime payments to staff should be taken into account by employers when calculating their holiday pay, in addition to their basic salary payments. This ruling follows earlier judgments in British Airways plc v Williams and Lock v British Gas Trading Limited which concerned allowances and commission payments and ruled that where they form part of a workers ‘normal pay’ they should be taken into account for holiday pay calculations.

The ruling could be costly for many employers as backdated claims could also be made by employees, however today’s judgment clarifies that any claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments. It was also held that travel pay arrangements, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

This could be an expensive decision for many employers and I anticipate it will go to the Court of Appeal as it has such a wide reaching impact. Many employees have a basic level of pay and are paid overtime, commission or bonuses on top which they rely on as part of their normal remuneration. Today’s judgment confirms that holiday pay must include all such elements of normal remuneration and that tribunals can and should interpret the Working Time Regulations to achieve that result.  For many employers, their business model may need to be completely rewritten in light of this.

My advice to employers affected by today’s judgment is to review contractual leave arrangements with a view to ensuring that overtime, commission or other relevant variable payments are factored into holiday pay due under the Directive. Any amendments to the Working Time Regulations to implement the effect of the above judgments may take some time so relying on the recent case law is the best way forward.