A greater liability for employers over holiday pay was headline news recently. The hospitality industry is no doubt considering how this might affect them.

In a recent landmark case (Bear Scotland–v- Fulton) the Court decided that non-guaranteed overtime should be reflected within a workers’ holiday pay.  i.e. that holiday pay should not just be based on a worker’s basic salary but should more closely reflect the workers’ actual earnings, including some kinds of overtime.

Non-guaranteed overtime

In the hospitality and leisure industries many workers are employed to work basic hours for a basic salary but then agree to voluntary overtime in addition.  In the Bear Scotland case the employees’ contracts included non-guaranteed overtime.  They were contractually required to work overtime when it was offered but there was no guarantee that the employer would provide overtime.  This is very different from genuinely voluntary overtime which employees can chose whether or not to work when it is offered.  Voluntary overtime is less likely to be part of an employee’s “normal” pay.  Therefore the impact of the ruling in the hospitality sector will probably be far more limited than it might have appeared at first sight.

Normal Pay

In essence, the Courts require employers to consider what a worker’s “normal pay” is and ensure that a worker is not financially disadvantaged by taking holiday. Where a worker is accustomed to earning commission, or working overtime, they can find themselves in the difficult position of receiving less income during the periods they take annual leave because they are paid their basic salary only. The Courts have been concerned that this could lead to workers being reluctant to take holiday.

In considering whether it is correct that overtime should be incorporated into holiday pay, the Employment Appeal Tribunal stated that employers need to determine a worker’s “normal pay”.  Payment will need to have been received over a period of time and should be directly linked to the tasks that the employee is required to carry out.

The Judgment has not provided details of how overtime should be calculated by employers although it seems likely that the reference period used under the Working Time Regulations 1998 will be adopted, therefore calculating an average week’s pay based on the previous 12 weeks worked.

Retrospective claims

The greatest concern for employers is the potential liability which they might face as a result of claims dating back a number of years. Whilst it is highly likely that this part of the decision will be the subject of an appeal, the decision has determined that workers will only be able to claim arrears of holiday pay (where they have been paid basic pay only) for consecutive holidays with no more than 3 months between them. In other words, if there is a break of more than 3 months between holidays taken by any individual worker, the chain is broken.

It is important to note that the Judgment stated that overtime payments will only need to be added to holiday pay for the 4 weeks’ holiday granted under European Law and not the additional 1.6 weeks granted under the Working Time Regulations 1998. Employers will therefore need to decide initially whether to pay the same amount for both “types” of holiday or whether to distinguish between the two types of holiday and pay different amounts for each (which may be more attractive financially but would be administratively more complicated).

What should employers do now?

For the time being the Bear Scotland case is law.  If an employee’s “normal pay” includes an element of overtime, then their holiday pay should reflect this.  There may be changes in the future however, as the decision will be appealed to the Court of Appeal.  In addition, Vince Cable, Business Secretary, has announced the setting up a new taskforce to consider how the impact of the ruling on business can be limited.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.