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Landmark Holiday Pay Ruling Spells Flood of Expensive Claims for Employers

Nov 04, 2014

A landmark ruling by the Employment Appeals Tribunal today means that millions of employees will now be entitled to extra holiday pay if they work regular overtime shifts.

The European Working Time Directive was brought into the UK by the Working Time Regulations 1998. This legislation established a worker’s entitlement to payment during periods of annual leave at a rate of one week’s pay for each week of leave. Historically however, solely the employee’s basic pay has been taken into consideration for these purposes.

The judgment in Bear Scotland v Fulton (and conjoined cases) decided today however, that the UK interpretation has been incorrect, and that employees should receive their ‘normal’ pay when taking annual leave, which should include any regular overtime payments employees received. The unions funding these cases have argued that employees who heavily rely on overtime payments as part of their salary will be reluctant to take holiday as their pay will drop during periods of annual leave. This was, of course, the exact opposite intention of the working time legislation.

What this means going forward, is that employees will be entitled to an additional sum of money to reflect normal non-guaranteed overtime as part of their holiday pay. Employers will therefore have to increase all affected employee’s holiday pay in the future, but may also now potentially face a flood of extremely costly retrospective claims for backdated unpaid holiday. This could have catastrophic consequences for many employers who will not have budgeted for hefty pay-outs of this nature.

The only saving grace for employers appears to be that these enhanced holiday payments apply to only 4 weeks holiday pay guaranteed under the Working Time Directive, and not the 5.6 weeks implemented under the Working Time Regulations. Furthermore, employees will have to act quickly as claims for unpaid holiday must be brought within three months of the last underpayment of holiday pay, or the claim will be out of time.

Business Secretary Vince Cable has announced he will be setting up a new task force of representatives to assess the impact of the ruling on businesses.

Employers who pay employees heavily on a commission basis should also watch this space carefully, as further cases are to be decided in the next number of months, as to whether commission payments should also be included as part of holiday pay.

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