National news is feverishly reporting today’s decision by the Employment
Appeal Tribunal regarding the calculation of holiday pay amidst concerns
from government and industry that it could have serious financial
implications for many businesses and the economy generally.
As widely predicted, the EAT has said that holiday pay needs to include pay
for non-guaranteed overtime which was worked by the employee in the period
before the holiday. ‘Non-guaranteed overtime’ means overtime that the
employee is contractually required to work, but which the employer does not
promise to offer. It follows that guaranteed overtime is also covered by
The EAT decided, though, that this only applies to the core legal holiday
entitlement deriving from EU law, being four weeks each year. The UK legal
minimum is of course 5.6 weeks, but the additional 1.6 weeks is a domestic
UK rule, not one determined by the EU, so that can be paid without overtime.
So too, therefore, can any further holiday over and above the legal minimum
which an employer elects to provide. Whilst that is good news for
employers, it raises the tricky prospect of having two rates of holiday pay
and the need for systems to determine which element of holiday an employee
The fears that this ruling would open the floodgates to claims for arrears
of holiday pay going back as far as 1998, leaving many employers with a
potentially enormous bill, may, however, be exaggerated.
The EAT has concluded that, under the working time rules, successive
underpayments of holiday throughout an employment should not necessarily be
regarded as a ‘series of deductions’ allowing all arrears to be claimed. If
there is a gap between two underpayments (i.e. two periods of holiday) of at
least three months, the chain is broken and no claim can generally be made
for the underpayments before the three month gap.
In principle that sounds like good news for employers as most employees are
likely to have had at least a three month gap between holidays in the recent
past. Bear in mind, though, that a single day of holiday would be enough to
preserve the historic right – and that might include a paid bank holiday
(bank holidays being spread across the year, of course). On the other hand,
as noted above pay for days taken over the four week EU minimum do not,
according to the EAT, need to include overtime pay so they may have been
paid lawfully, thus allowing the three month gap between unlawful payments
to be achieved.
Is this starting to sound complex? I fear so, and in fact it exposes the
slightly dubious logic of the EAT’s approach. Nonetheless, it signifies
that there may well be a policy-based attempt to put a brake on
retrospective claims. That will no doubt be encouraged by Vince Cable who
has set up a Taskforce which, according to a BIS Press Office tweet, will
‘look into limiting impact of holiday pay ruling’. That Taskforce consists
of seven employer’s organisations, but no unions or law centres. The
government’s stance on this is pretty transparent.
The EAT judgement does not address the possibility of an employee claiming
the underpayments as breach of contract claim, although there are reasons
for thinking that such a route would not be possible. If it were, claims
would be limited to six years of arrears though.
The ruling follows the recent European Court decision that holiday pay must
take account of sales commission. It paves the way for debates on whether
other forms of flexible pay, including bonus, must also be included in
An appeal to the Court of Appeal seems inevitable, particularly in relation
to this whole question of retrospective claims, with the potential for
onwards reference to the European Court of Justice. This legal story has
some way yet to run.
Especially in light of the determination on retrospective claims, employers
should not rush into any decisions. I do, though, recommend undertaking an
assessment of the pay package and what elements may have to form part of
holiday pay going forward so that future employment costs can be assessed.
That in turn might have an effect on the pay increases an employer feels
able to grant.
Employers should also brace themselves for tribunal claims to be lodged by
employees who want to protect their rights to higher levels of holiday pay
as early as possible.
If you want to discuss the implications of this decision with me, please do
feel able to get in touch.
T: +44 (0)7771 725341