The law surrounding holiday pay has been in a state of flux for some time, however it is only recently that the issue has hit the headlines with three important holiday pay cases – on the significant issue of whether overtime should be included in the calculation of holiday pay – being heard in the Employment Appeal Tribunal the week before last.
The Working Time Regulations 1998 (“WTR”) implement the European Working Time Directive (the “Directive”) into English law. Under these Regulations all workers are entitled to 5.6 weeks’ statutory holiday each year. Whilst the Directive is silent as to the rate at which holiday pay is to be paid, the WTR adopts the existing concept of a week’s pay contained in the Employment Rights Act 1996 which, to date, has enabled employers to pay holiday pay on the basis of basic salary only.
Recent decisions, however, of both the European Court of Justice and some UK Employment Tribunals, have cast doubt on this method of payment; indicating that any additional payments which are ‘intrinsically linked’ to the performance of tasks under a contract of employment are to be included.   The reasoning being that holiday pay must, in principle, put the worker in a position during periods of annual leave that is comparable to periods of work – the calculation of holiday pay should not discourage the worker from taking annual leave.  This has therefore caused a great deal of consternation regarding, in particular, the payment of overtime.
In the cases of Bear Scotland Ltd v Fulton and another, Hertel (UK) Ltd v Wood and others and Amec Group Ltd v Law and others, the Employment Tribunals held that any overtime which is intrinsically linked to the duties a worker is required to perform under their contract of employment should be included in the calculation of holiday pay (whether such overtime is voluntary or compulsory in nature and whether or not it is guaranteed by the employer).  The EAT’s judgment in these cases was reserved on 1 August 2014 and the decision is eagerly awaited by both lawyers and employers alike.
Should the EAT uphold the tribunals’ approach that overtime payments are to be included in the calculation of holiday pay, the decision could have huge financial ramifications.  Not only would this impact businesses’ ongoing future costs as regards holiday payments, but workers could claim for a series of unlawful deductions from their wages, exposing employers to claims for back-pay dating back to the start of the individual’s employment or the implementation of the WTR in 1998 (whichever is the later).
Given the potential impact of the EAT’s decision, it is possible that the cases will be referred to the European Court of Justice for further consideration. However, whatever the outcome, it is hoped that the government will intervene to limit the – potentially crippling – impact on both small and large scale employers.
OTB Eveling Comment
There are a number of options available to employers at this stage, including:

  •  to agree to reimburse workers for past payments – in full or in part – in anticipation of a finding in the employees’ favour and begin calculating holiday pay correctly;
  •  to wait and see the outcome of the appeals and deal with the issue accordingly; or
  • to start including overtime in holiday pay calculations now (without any reimbursement) to attempt to time limit any tribunal claims for back pay.  This is on the basis that such claims need to have been brought within three months from the date of the last deduction and to therefore start including overtime now would effectively ‘break the chain’.