Holidays from hell?

I’m sure I’m not the only employment lawyer who has been fielding calls and emails this past month from employers anxious to know what the recent and well-publicised Employment Appeals Tribunal decision on holiday pay means for them.

Employers, workers and lawyers alike are all still trying to work out the implications of last month’s ruling in the case of Bear Scotland v Fulton (and conjoined cases). In the case, it was decided that, in calculating how much holiday pay a worker is entitled to, employers now have to take into account how much that worker makes in overtime, paid travel and commissions, rather than just looking at their basic salary

This will mean higher holiday pay for millions of workers across the country, a move which trade unions have applauded. However, employers’ associations have been preaching doom and gloom as they predict that the extra pay-outs involved could send small and medium sized businesses under and cause job cuts as employers are forced to let workers go to reduce their losses.

Whichever view you take, you can guarantee that employers and lawyers all over the country will be scratching their heads to try and come up with solutions to all of this.

So what exactly does the ruling mean?

The case centred on the meaning of the Working Time Directive, an EU directive which is part of UK law by virtue of the Working Time Regulations 1998. According to the Directive, workers are entitled to be paid their “normal remuneration” whilst on holiday. The key question has been what this means, and the EAT has decided that it means the amount a worker actually earns on average per week (taking into account overtime, paid travel and commission payments) as opposed to simply what a worker’s basic salary is. However, this will only apply to the first 4 weeks’ of holiday taken each year. In the UK, workers are allowed a minimum of 5.6 weeks’ holiday per year (which includes bank holidays), so the remaining 1.6 weeks will only need to be paid at the basic salary rate.

What will complying with the ruling involve?

In basic terms, employers will now have to give workers holiday pay equivalent to the amount that they actually earn each week, taking into account any overtime, paid travel time (not to be confused with travel expenses) and commissions earned.

Employers may also be faced with historic claims from workers for holiday pay dating back some time that did not take into account overtime, paid travel or commissions. However, the EAT have put a significant restriction on this. Where a break of 3 months has taken place since a worker last took holiday, that worker will be out of time for bringing a claim for holiday pay which relates to the period prior to that 3 month break.

This should help employers out a lot because not only will it prevent many workers from bringing claims in the first place, but it also gives them scope to find ways of limiting claims by their current staff. For example, employers may now attempt to prevent a worker from taking holiday for a period of time in the near future in order to affect a break of at least 3 months since that worker’s last holiday, with the intention of running that worker out of time for bringing a historic claim for holiday pay against them.

What might happen in future?

In the long term, many businesses may try to reduce their costs by taking on agency and part-time staff rather than offering overtime to their existing workers. Businesses may also be relieved to hear that the Government could also step in to help. The Department for Business, under Vince Cable’s instruction, has set up a taskforce to “discuss how the impact on business can be limited”.

It’s also worth bearing in mind that the Bear Scotland decision is not the end of the story. The EAT is only the second port of call in the judicial process and has granted permission for the case to go to the Court of Appeal. It could then go on to the Supreme Court, which is the highest court in Britain. It’s safe to say, therefore, that it’s likely to take several years before we have a final verdict from the courts on this issue. Yet more uncertainty is caused by the fact that if the UK ends up leaving the EU, the ruling would become ineffective anyway because the Working Time Directive is part of EU law.

Whatever happens in the long-term, businesses and organisations must now act and plan ahead effectively in order to avoid some real headaches further down the line.

Owen John is an employment lawyer at Darwin Gray LLP. He can be contacted on ojohn@darwingray.com and 02920 829100.