Calculating Holiday Pay
The media has been flooded with news this month regarding a UK Employment Appeal Tribunal judgement which is likely to mean that employers will need to change the way in which they calculate holiday pay for their employees.
The landmark ruling on Tuesday centred around the case of Bear Scotland v Fulton where employees claimed that their voluntary overtime pay should be included in their holiday pay. Two further cases, Amec v Law and Hertel v Wood were also considered in the ruling. The decision effectively changes the law so that organisations will no longer be able to base holiday pay calculations on basic pay alone, but will now have to include regular overtime payments (being overtime that the employee is not entitled to refuse) as well.
Furthermore, from this ruling and in conjunction with some other cases which are to be determined at EU level, it is likely that all pay elements that are linked to an employee’s “normal” work attendance, such as commission, premium payments and attendance payments should be taken into consideration when calculating holiday pay. There has been no ruling yet that purely voluntary overtime should be included but our view is that if tested, it is more likely than not to be included.
Whilst there were initially concerns that such a decision to include overtime in holiday pay would lead to some businesses seeing large claims for back pay, these fears were significantly lessened as the EAT ruled that underpaid holiday claims are in practise unlikely to extend back for more than one holiday year and in many cases for only three months.
Furthermore, the new rules only apply to the 4 weeks holiday prescribed under EU legislation and not to the additional 1.6 weeks that arise typically as a result of UK Bank Holidays. This throws up the prospect of a two tier holiday pay system which seems unwieldy and illogical.
The practical mechanics of how the holiday pay rate is to be calculated are also not clear – should one use an average eligible earnings over the 12 weeks prior to the holiday being taken or should holiday pay be calculated with reference to the average over the previous 52 weeks as in some cases that may be fairer. We have no ruling on this.
Whilst the ruling may yet be appealed (so possibly amended or reversed), employers should urgently review the financial impact on their business of this decision and consider how best to tackle the practical steps needed to implement the new method of calculating holiday pay. This may include getting to grips with what method should be adopted for making the now more complicated calculation and also perhaps reviewing policies and practices surrounding overtime, particularly where premiums rates are paid.
Please note that the above is a brief summary of the ruling – which runs to 48 pages – and its potential implications so is not a substitute for taking professional advice on this matter as there are other potential complications that may affect your particular organisation.