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Overtime should count in holiday pay, Tribunal rules – the corporate advisers’ update

An important ruling which is likely to affect corporate advisers and their clients has been made. Here, Jamie Gamble from our employment team outlines what it means for you.

What was the decision?
In the cases of Bear Scotland v Fulton (and conjoined cases), the Employment Appeal Tribunal (EAT) has confirmed the European Court of Justice’s view that holiday pay must be based on ‘normal pay’ and, in these cases, that normal pay included overtime and paid travelling time, where appropriate and that normal pay needs to be averaged over the 12 weeks prior to the holiday.

​It is important to note that UK employees have a statutory holiday entitlement of 5.6 weeks per year. The EAT confirmed that this decision only relates to the 4 weeks’ holiday entitlement per year that is derived from the European Working Time Directive and does not apply to any additional holiday entitlement provided by UK legislation or a contract of employment.

​Importantly the EAT also made a decision on how far back employees can claim for holiday pay if they assert (as they did in these cases) that they have suffered an unlawful deduction from wages as a result of the underpayment of holiday pay.

In a technical section of the judgment, the EAT held that because the UK provides an extra 1.6 weeks holiday entitlement per year to which this judgement does not apply, employers will have paid the correct holiday pay for those 1.6 weeks in each holiday year. The result of this is that employees will not be able to argue that they currently have an unbroken series of underpayments of holiday pay spanning back many years.

Employees have to issue claims of unlawful deduction from wages within 3 months of the last of the series of deductions of which they complain. As they will have been paid the correct holiday pay for the 1.6 weeks additional entitlement in each holiday year, that will have created breaks in the series of deductions and claims should have been issued within 3 months of the last underpayment prior to each of those breaks.

In essence, this means that an employee is unlikely to be able to claim holiday pay as unpaid wages beyond the current holiday year. We must stress that this case did not address whether employees can use breach of contract claims to claim for up to 6 years of underpayments if they are outside of the 3 months time limit.

Additionally, the Judge indicated this part of the decision was ‘arguable’ and of ‘public significance’, meaning this is a likely area of appeal and it is possible in the future that it may be held that paying holiday pay correctly for the additional 1.6 weeks does not cause a break in the series of deductions in respect of the 4 week entitlement to which this case applies.

​Following this case it is difficult to see how an employer could avoid including other amounts (for example commission and bonuses) in the calculation of holiday pay for the 4-week entitlement.

Why is it important?
Businesses may now have a large additional liability for historic underpayment of holiday pay.

Ongoing, the real profitability of a business may have been reduced.

What is likely to be the effect on transactions?
If your clients have been involved in acquisitions in recent years, buyers may look to bring claims against sellers based on warranties and indemnities given in respect of compliance with holiday pay legislation. However, warranties and indemnities are normally time limited so any time periods need checking to see if they are close to expiring, if so, a notice of claims could be considered to protect their position.

The wording around changes in law and how that affects warranties also needs reviewing to see it has any impact.

If your clients are involved in ongoing and upcoming acquisitions then buyers should do further due diligence on payments made to employees that are in addition to basic pay to assess future and potentially historical employee costs.

Buyers should also seek indemnities in respect of historical liability and warranties in respect of the accuracy of the information provided about the different components of pay and should consider if retentions are required in the event that liabilities crystallise.

You should be aware this decision will affect business acquisitions to which TUPE applies as well as share acquisitions, although the size of the liability may be less as it will only apply to the employees transferred.

How can Ward Hadaway help?
If you have concerns about the effect of this ruling on your clients or on your activities, please contact Jamie Gamble in our Employment Team or your usual Ward Hadaway contact.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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