Holidays with that little bit extra

Sheila Fahy

When it comes to holiday, woe betide anyone who interferes with it. With tongue in cheek, I’ve frequently said that it is easier to close down a final salary pension scheme than it is to take away a day’s holiday from an employee. Anyone assessing the volume of litigation that started with the ECJ’s decision in Stringer on whether holiday accrues during periods of sickness, could well believe that there is a grain of truth in it.

For years, employers have followed the rules set out in the Working Time Regulations 1998 and paid holiday pay at the basic rate. Earlier in the summer, Europe ruled that, where commission was intrinsically linked to a role, it must be taken into account when calculating holiday pay (Lock v British Gas). Last week, non-guaranteed overtime came under scrutiny.

In a nutshell, the EAT ruled in three cases heard together (Bear v Scotland, Hertel v Woods, and Amec v Law) that non-guaranteed overtime – ie overtime the employee is obliged to work, even if there is no corresponding obligation on the employer to provide overtime – should be factored into the holiday pay calculation as part of normal remuneration. So employers have been getting it wrong, even though they followed the rules. Now they are being saddled with a huge bill for backdated holiday pay, where it has been paid incorrectly.

The news was not all bad though. The EAT said that non-guaranteed overtime only applies to 20 days of holiday guaranteed by the EU, not the additional eight days, which are a gift of the UK Government. The latter, and any additional contractual holiday can be paid at the basic rate. Employers, therefore, have been paying some holiday pay incorrectly (in legal terms, a series of deductions) and some at the correct basic rate.

But which holiday is which? The first 20 days are the EU holidays, which must include the additional paid elements, and the balance can be paid at the basic rate.

The best news of all for employers is that the EAT then ruled that, if there is a break of more than three months in the series of deductions between the underpayment and the correct payment, the link in the series is broken and claims would be out of time. Although this does not extinguish historic liability, it limits it.

Next steps

One of the pressing issues for employers is what to do next: either do nothing and wait to see if an appeal is lodged, or take pre-emptive action to minimise liability. Whatever route is chosen, the hard work and tough decisions begin now.

Comments published on Employment Talk do not necessarily reflect the views of Allen & Overy.

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