New Rules on calculating Holiday Pay

In a ground-breaking decision this morning (4 November 2014), the Employment Appeal Tribunal has upheld the Employment Tribunal’s decision that both compulsory and voluntary overtime must be included in addition to basic salary for the purposes of calculating a worker’s holiday pay.

Traditionally employers have paid holiday based on basic salary only. In the case of Fulton and another v Bear Scotland Limited, employees of a road maintenance company have successfully argued that payments made in respect of overtime undertaken voluntarily by them should be included for the purposes of calculating their holiday pay.

The implications of this ruling are significant and will be potentially financially crippling to businesses. Not only will employers have to increase the amount of holiday pay they pay workers to take into account all overtime, they may also face historic underpayment liabilities going back up to 16 years in respect of some workers.

Current workers will have the right to make an unlawful deduction of wages claim for underpaid holiday which may be permitted to go back up to 16 years to coincide with the introduction of the Working Time Regulations 1998. Former workers will have the right to issue a claim in respect of historic liabilities any time up to 3 months following the last alleged underpayment. It is likely that workers will join forces to pursue such claims as class actions, which may be supported by trade unions.

The Fulton case is one of a number of recent cases determining the issue of calculation of holiday pay, including the landmark Lock v British Gas case, in which the European Court of Justice held that holiday pay must be calculated to account for the loss of commission that a worker would have earned while on holiday, so that they do not suffer any shortfall in earnings by reason of taking their annual leave. We are currently awaiting the Employment Tribunal’s re-hearing of this case, which should determine how employers are to calculate this – most likely using a 12-month earnings reference period.

The employer in the Fulton case has the right of appeal to the Court of Appeal – a process which may take years. Given the financial implications of this decision, we consider an appeal likely. Meanwhile, today’s decision is binding law and employers who pay employees’ overtime or commission are advised to undertake an audit in order to assess their potential liability and consider how best to mitigate any risk going forward.