Commercial & Employment

Calculating Holiday Pay

Posted on 5th November 2014

Bear Scotland & Others v. Fulton & Others UKEAT/0047/13/BI

EAT Langstaff J- Calculating Holiday Pay

Case Note by Matthew Pascal, Barrister

Summary & Practical Issues:

1. Employees are now entitled to holiday pay calculated by reference to overtime payments they have received averaged out over a period of 12 weeks from the date holiday pay is paid to the employee. Employees must alter the way they calculate holiday pay accordingly.
2. Employers are at risk of claims for underpaid holiday pay in the past. Each case will depend on the need for the employee to be able to show an underpayment within 3 months of the date any claim is presented and a series of similar underpayments, each within 3 months of each other.
3. Sales commission also needs to be included and averaged out in the same way (not decided in this case but decided by the CJEU in Lock v. British Gas Trading Ltd [2014] ICR 813).

Regulation 13 of the Working Time Regulations 1998 provides that workers are entitled to four weeks' annual leave in each leave year. Regulation 16 provides that workers are entitled to be paid during any period of annual leave at the rate of a week’s pay in respect of each week of leave.

A weeks pay is determined by reference to sections 221 to 224 and 234 of the Employment Rights Act 1996. S. 234 appears to exclude overtime when calculating a week’s pay unless the employer guarantees to provide the overtime (“guaranteed overtime.”).

First Issue: Scope of Article 7

The case was concerned with “non-guaranteed” overtime, that is, overtime offered by an employer to an employee where the employer is under no duty to offer it.

Langstaff J concluded in relation to Article 7 that: “’Normal pay’ is that which is normally received.” That is either a settled amount or, where the amount paid varies, an average calculated in accordance with the relevant national legislation.

Second Issue: How to interpret the Working Time Regulations and the relevant sections of the ERA?

Langstaff J decided that to give effect to his interpretation of Article 7, regulation 16 of the Working Time Regulations had to be read with the following text (underlined italics) inserted:

16 Payment in respect of periods of leave

1. A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13 and regulation 13A, at the rate of a week's pay in respect of each week of leave.
2. Sections 221 to 224 of the 1996 Act shall apply for the purpose of determining the amount of a week's pay for the purposes of this regulation, subject to the modifications set out in paragraph (3).
3. (3) The provisions referred to in paragraph (2) shall apply -(a) …;(b) …:(c) … and;(d) as if the references to sections 227 and 228 did not apply and, in the case of the entitlement under regulation 13, sections 223 (3) and 234 do not apply

Third Issue: Jurisdiction of the ET to hear a Deduction From Wages Claim More than 3 Months After the Payment of the Wages from Which a Deduction Has been Made

This remains the most contentious issue. How far back can an employee go?

What constitutes “a series of deductions?” Langstaff J emphasized that in each case this would be a question of fact. A series implied a set of common events of the same character, having a factual similarity, occurring within a period of time, having a temporal connection. In these cases, the common theme will be leave under regulation 13 and payments for that leave omitting payments in respect of non-guaranteed overtime. These underpayments will be made, normally, in the month after the leave was taken and in which holiday pay is paid to the employee. Where, however, there is a gap of more than three months between these underpayments, that will extinguish the right to bring a claim in respect of the last underpayment. Where there are a series of underpayments within three months of each other, the decision seems to leave open the possibility that claims going back to the date the Regulations came into force would be permitted.

Employers and employees will need to look carefully at the dates when holiday pay was paid, see if over-time had been worked in the 12 weeks before the leave was taken, and see if the holiday pay reflected the basic pay plus the 12 week average of overtime payments.

The EAT considered two other issues – one concerning the contractual interpretation of the particular contracts of employment applicable to the Claimants and the second concerned whether or not pay for time spent travelling to and from a place of work also fell to be included in the calculation of pay for the purposes holiday pay. Langstaff J said it did.

Langstaff J granted permission to appeal to the Court of Appeal, so this decision is not, as yet, set in stone.