Following the landmark decision in Lock v British Gas, the EAT has published its judgment in the three conjoined cases of Bear Scotland v Fulton and Baxter; Hertel (UK) v Wood; and Amec Group v Law. It may make disquieting reading for employers who pay significant amounts of overtime. In certain circumstances, the EAT says, holiday pay must be calculated on the basis of not just basic pay, but overtime as well. Overtime, the EAT held, can be “intrinsically linked” to the performance of tasks under a worker’s contract and, if so, will therefore form part of their “normal remuneration”.

Rationale

The fundamental principle underpinning these cases and the Lock case is that workers are entitled to a certain amount of time off in a year, and should not be discouraged from taking it. In Lock, the court held that if an employee does not accrue bonus during holiday time, they might be discouraged from taking their holiday entitlement because of the financial disadvantage of doing so.

The EAT has concluded that the same principle applies also to certain types of overtime.

Impact

This judgment’s impact is not merely on future payments. It does not create new law; rather, the judgment is an elucidation of the correct legal interpretation of the law as it already stands. It follows that if an employer has continuously failed correctly to calculate holiday pay then it may be liable for backdated payments relating to the series of miscalculations.

Where there has been a series of deductions arising from the employer’s failure to calculate holiday pay correctly, workers may bring claims for all deductions in that series. However, a series will be broken if there is a gap of more than three months between deductions, and any claim for holiday pay wrongly calculated deducted prior to the 3 month gap will be out of time. It is important to note that the ruling relates only to the 20 holiday days under the Working Time Directive, not the 8 additional days granted by domestic legislation or to any other additional holiday granted under the individual’s contract. This is a significant point, as it makes it less likely that a series of deductions will span a period of time greater than a single holiday year. It therefore seems likely that many claims will be limited to underpayments in the most recent leave year only (although every case will be fact-specific and require individual assessment).

Additionally, workers may only bring claims in the employment tribunal within 3 months of the last deduction in a series. The termination of employment will unequivocally be a break in the series, so former employees whose employment terminated more than three months ago and who have not taken steps to bring claims will be out of time.

In addition to facing having to pay arrears of holiday pay to the workers concerned, employers will also have to budget for the NICs that will be chargeable.

Appeals

This decision may not be the final word: given the potential liabilities at stake, an appeal can be anticipated. If there is an appeal, any pending claims should be stayed pending its outcome, but in the meantime employers might consider budgeting for the risk of successful unlawful deductions claims. We will keep you updated as the position develops.

For advice on dealing with unlawful deduction claims arising from this decision, contact a member of the Bates Wells Braithwaite employment team.


Posted on 04/11/2014 in Legal Updates

Back to Knowledge