We employment lawyers have been getting very animated recently (more than usual) as a result of a number of legal cases (both here and in Europe) regarding the calculation of holiday pay for workers. The EAT decision Bear Scotland v Fulton handed down on 4th November has firmly put the cat among the pigeons.
What’s all the fuss about?
Up until recently, the basis upon which holiday pay was calculated for employees and workers had been relatively straightforward. In relation to salaried employees for instance, no calculation was actually necessary – holiday pay was typically based on paying the employee their normal monthly salary notwithstanding that they may have taken holiday during that month.
The tide started to turn following a claim brought by British Airways pilots who disputed the way in which their holiday pay was calculated. They are paid a basic salary and their holiday pay was based on this sum. However, pilots also receive a flight allowance which is an additional sum per hour for each hour they spend in the air. They claimed that their holiday pay should also incorporate this allowance – failure to do so meant they were actually financially worse off for taking holiday, which cannot have been intended by the legislation. Their claim was upheld and this led to further claims, arguing that holiday pay should also incorporate commission and overtime received in the period preceding the actual absence.
The decision of the EAT in Bear Scotland has confirmed that workers are entitled to have non-guaranteed overtime reflected in their holiday pay, for the first 4 weeks of their statutory holiday entitlement. There remains some uncertainty as to whether this decision also applies to voluntary overtime (as opposed to contractual overtime) but such is the concern among the Government that they have created a special taskforce to consider the impact of this ruling.
What are the implications?
There are two key implications for employers:
- There may be an historical liability for previous holiday payments. Some organisations are biting the bullet and owning up to such liabilities already, and you may have heard in the news about John Lewis plc paying out £40million compensation to 69,000 workers after discovering an error in how it calculated holiday pay for staff who worked Sundays and bank holidays.
- The future calculation of holiday pay (for the basic 4 weeks leave granted by legislation) may need to be adjusted to reflect additional income earned by the employees and workers prior to the period of holiday.
What do employers need to do?
What is abundantly clear is that this is not the end of the matter. The EAT decision in Bear Scotland is likely to be appealed and there is also a test case in relation to commission-based pay due to be heard before the end of the year, so there is more to come.
In the meantime, employers would be well advised to retrospectively audit the way in which holiday pay has been calculated historically in light of these cases to ascertain whether they have any potential liability. It may then be necessary to factor in a financial contingency for the possibility of employees or workers pursuing claims for a previous underpayment.
It is of course equally open to adopt the approach taken by John Lewis but that is very much a matter for each employer and indeed legal advice should be sought before embarking on such a step. This is because there are also time limit issues that restrict an employee or worker’s ability to pursue a claim for an historical underpayment.
As regards the future payment of holiday pay, this poses a bigger conundrum. Some employers may choose to change the way they calculate holiday pay to give effect to the developments outlined above but some may choose to maintain the status quo and see what unfolds with the appeal and test cases. If the latter, it may equally be sensible to review the calculation of holiday pay and build in a financial contingency for claims in the future.
The above represents one of the most significant changes to employment law in recent times. It has the potential to place a substantial financial burden on employers and may give rise to numerous complaints and claims from employees and workers. It remains to be seen whether the Government will intervene to limit the potential damage.
If you would like to talk about how this could affect your business, please give one of our employment law solicitors a call in St Albans on 01727 832830.