Today’s Holiday Pay Ruling: Some Bad Some Good

United Kingdom

A significant employment law decision has been issued by the Employment Appeal Tribunal (EAT) in which it has ruled that “non-guaranteed” overtime should be included in calculations of holiday pay. However, this blow for employers is tempered by the ruling potentially limiting the extent for historical holiday pay claims. On the back of the decision the Government swiftly announced the appointment of a taskforce to review its impact.

Leave to appeal has been granted to the Court of Appeal, although the EAT judge indicated that, whilst allowing it, he considered that such an appeal on the key issues of; including non-guaranteed overtime in holiday pay, and the ability to interpret the Working Time Regulations 1998 (“WTR”) to give effect to the provisions of the EU Working Time Directive (“WTD”) on holiday pay was unlikely to be successful.

EAT Judgment

The EAT ruled that non-guaranteed overtime and other supplemental payments relating to travel should be included in holiday pay calculations. However, this ruling applies only to holiday pay in respect of the 20 days holiday mandated by the WTD. Therefore the 8 days of ‘additional leave’ provided for by the WTR does not have to include these amounts. Further, the EAT ruled that these 8 additional holiday days are the last 8 days to be agreed upon by the employer and the worker in that leave year. A previous decision had said that employees could choose which leave was covered by the WTD, and so attract the higher rate of pay.

Significantly, and rather surprisingly the EAT ruled that an underpayment in respect of holiday pay (categorised as a deduction from wages) which is separated from the next such underpayment by a period of more than three months is out of time for a claim to be brought (subject to the reasonable practicability test). This decision is likely to restrict claims for historical holiday pay, because the 8 additional days’ holiday taken under the WTR will in many cases mean that there is a gap of at least three months between one and the next underpayment in respect of holiday pay due in accordance with the WTD, meaning such claims are time barred.

What is the reference period?

It is not clear whether the ruling endorses the 12 week reference period to assess how holiday pay should be calculated, although, it appears that the EAT has followed the earlier Tribunals’ use of a 12 week period. Of course Parliament may intervene in this area after Vince Cable announced the setting up of a taskforce to assess the possible impact on business of this ruling on holiday pay.

Next Steps

Because the parties in Wood have been given leave to appeal to the Court of Appeal, there is a risk for employers taking action in light of this decision that they jump the gun. By contrast, workers and unions seeing this decision as a green light to bring claims, or those bringing claims to avoid a time bar, are likely to find that such claims will be paused until a final determination is made by the higher courts. However, it is worth noting that this decision is binding on Employment Tribunals.

For now, employers should assess their possible contingent liability to unpaid holiday pay, which is potentially limited now that the EAT has restricted how far back holiday pay claims can be made. In doing so employer should ensure that they take into account holiday patterns prior to the end of the leave year. Employers should also consider how they wish to calculate holiday going forward if the EAT decision is endorsed by the Court of Appeal. This should include whether they would implement a two tier level of holiday pay; paying 20 days of “WTD” leave at the higher rate including overtime and 8 days of additional “UK” leave at a lower rate, which could present specific challenges for payroll systems.

Employers may also wish to take practical steps to mitigate their potential liability, whatever the outcome on the issue of holiday pay calculation, for example by reducing the amount of overtime being worked.