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Employers Face Tide Of Back-Dated Holiday Pay Claims

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JCP Solicitors’ Director and Head of Employment, Paul Shuttleworth addresses employers’ concerns about a particularly thorny holiday pay issue. 

Employers are increasingly operating in a changing world and recent decisions from the Employment Appeal Tribunal has shifted the landscape for them significantly, by changing the way holiday pay should be calculated.

The decisions affect the calculation of holiday pay under the Working Time Directive and it has caused a grey cloud of concern for employers whose staff are regularly paid commission and/or work overtime, and who traditionally might not have had these payments included when their holiday pay was tallied.

The potential impact for employers in respect of historical claims by workers for the inclusion of commission, overtime payments and other allowances in their holiday pay, is very significant too.

The first of the recent cases was Bear Scotland Limited and others v David Fulton and others. One of the issues the Tribunal was asked to consider in this case was whether non-guaranteed overtime should be included in holiday pay calculations.  The Employment Appeal Tribunal found that it should.

Paul explains: “The Tribunal established that non-guaranteed overtime pay was part of the employees “normal remuneration” and therefore it should be included in the calculation of holiday pay.  (In this regard Article 7 of the Working Time Directive requires normal remuneration, or pay which is “normally received”, to be paid during the periods of holiday).”

He continues: “It was found that there should be an intrinsic or direct link between the payment that is claimed and the work that the individual is required to carry out.  Article 7 requires non-guaranteed overtime - that is, where the employer is not actually obliged to provide overtime but the employee is obliged to work if asked to do so - to be paid during annual leave.  The position in respect of voluntary overtime is slightly less clear.”

The practical outcome of the Employment Appeal’s decision in the Bear Scotland case however was that non-guaranteed overtime should be included in the calculation of entitlement to holiday pay.

Paul says many employers will be nervous about claims from past employees too.

“Clearly these rulings have potentially opened the flood-gates to claimants seeking a back calculation of holiday pay, to include overtime and other additional payments".

“In an attempt to stem that potential deluge of claims the Government announced on the 18 December 2014 that Regulations have been placed before Parliament designed to limit the impact of the Bear Scotland’s decision on businesses.”

That legislation came will apply to claims presented on or after 1st July 2015 with the effect that there is now a 2-year “backstop” period on most unlawful deductions from wages claims.  This applies not only to claims for holiday pay but also to claims for wages and includes commission, bonuses, fees and holiday pay.

In a further recent case - Lock and others v British Gas Trading Limited and another - an Employment Tribunal (it’s not clear yet whether this decision will be appealed at the Employment Appeal Tribunal) found that there is no difference in principle between payment for a non-guaranteed overtime and payment in respect of commission as far as holiday pay is concerned. 

In Lock the Tribunal found that commission payments should be included when holiday pay is calculated.  What both these cases show is that the Employment Tribunals and the Employment Appeal Tribunal are now adopting the view that holiday pay should be calculated on the basis of actual earnings for actual work done.  

Paul continued: “As you can see, the potential ramifications for businesses whose employees regularly work overtime or regularly receive commission payments are huge, and there is the potential for large numbers of employees to come forward with claims for historical underpayment.

“It is likely, depending on the circumstances of each case, that such claims will be successful on the basis that there have been unlawful deductions from wages because of underpayments of holiday pay.

“However,” he says, “there are practical steps employers can take to mitigate the extent of potential historical underpayment claims. These include calculating liabilities now and making corrective payments to address underpayments.  JCP are advising many businesses regarding this approach and we are happy to discuss these measures further with other employers.”

Contact me, Paul Shuttleworth on: 01792 529636 or email paul.shuttleworth@jcpsolicitors.co.uk.

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