Holiday pay and overtime

The Employment Appeal Tribunal has handed down an important judgment on the calculation of holiday pay and whether it should include overtime payments. Sarah Lamont looks at the key points.

The Employment Appeal Tribunal's decision in the joined cases of Fulton v Bear Scotland Ltd and Wood v Hertel (UK) Ltd concerns the question of whether an employer should take a worker's overtime payments into account when calculating holiday pay, or whether holiday pay should only include basic pay.

The EAT has ruled that overtime payments should be included in holiday pay. All those involved in HR, finance and organisational development should be aware of the potential for increased holiday pay costs, both going forward and in respect of backdated claims.

In a similar case earlier this year, Lock v British Gas Trading Ltd (C-539/12), the Court of Justice of the European Union (CJEU) said that commission should be included in holiday pay where it forms part of a worker's 'normal remuneration'. The Lock case is due to return to the tribunal in February 2015 to consider whether domestic legislation can be interpreted in line with the European Court's decision and, if it can, how the level of holiday pay should be calculated.

Employment tribunals have been staying similar holiday pay calculation claims, pending the decisions in Lock and Fulton. Employers would be well advised to review their current arrangements for holiday pay and assess their exposure to the risk of claims, especially given that the time limit for such claims re-starts every time that underpaid holiday is taken and may be backdated.

Four key points have emerged from the EAT's judgment:

• although the overtime was non-guaranteed, it was required by the employers and regularly worked by the employees, so the employees were entitled to have that overtime included in the remuneration which had to be paid in respect of annual leave;
• payments made in respect of travel time were also part of the workers' normal pay (not expenses) and should, therefore, be included in holiday pay;
• this decision applies only to the minimum four weeks' leave granted under the Working Time Directive, not the additional 1.6 weeks under the Working Time Regulations;
• a crucial point (made at para.81 of the judgment) relates to claims for back pay. The EAT held that the "sense" of the relevant legislation is that, if a series of holiday underpayments is punctuated by a gap of more than three months, the passage of time will have broken the series – which indicates that claims for arrears of holiday pay would be out of time if there has been a gap of more than three months between successive underpayments. This will come as a welcome development for employers as, prior to today, it has been suggested that claims relating to a series of deductions could be backdated as far as the implementation of the Working Time Regulations in 1998.

Contrary to expectations, this case has not been referred to the CJEU, but it is likely that it will be appealed to the Court of Appeal given the potential financial impact on employers and the fact that permission to appeal has already been granted.

In the meantime, this case will be of critical importance to employers in both the private and public sector. We understand that the Department for Business, Innovation & Skills (BIS) will be setting up a taskforce to assess the impact of the decision and to understand the exposure that employers may face.

Sarah Lamont is a Partner in the Employment team at Bevan Brittan LLP. She can be contacted on 0870 194 8943 or This email address is being protected from spambots. You need JavaScript enabled to view it..