By Liz Iles, Senior Employment Consultant at Croner

The Employment Appeal Tribunal (EAT) has recently made a ruling in the case of Bear Scotland v Fulton that could have a significant impact on how companies calculate annual leave for their employees, says Liz Iles Senior Employment Consultant at Croner.

All employees are entitled to a minimum of 5.6 weeks’ paid annual leave under the Working Time Regulations and should be paid their “normal” week’s pay for this period. This is straightforward enough where an employee has set hours; the difficulty can arise when an employee does not have normal working hours or where they have normal working hours but receive additional payments, for things such as overtime.

If an employee who has no normal working hours takes holiday, a week’s pay is calculated using an average of the last 12 weeks worked. This would include commission and overtime.

In the case where an employee has normal working hours but receives additional payments, it had been accepted practice – and is expressly stated in the Employment Rights Act 1996 – that overtime was not included when calculating holiday pay. The Bear Scotland v Fulton ruling states that this is no longer correct and that ‘non-guaranteed’ overtime (defined as overtime that the employer is not obliged to provide but which, if the employer offers it, the employee is contractually obliged to perform) now needs to be included in the calculation of holiday pay.

If an employee is required to work hours in addition to their normal core hours, the Bear Scotland case means that employers should look back over a representative period, such as the 12 week average used for variable hours employees, to correctly calculate holiday pay going forward. Only in cases where an employee is genuinely under no pressure or obligation to accept overtime would this now be excluded from holiday pay calculations. This is likely to be extremely rare.

The liability is limited to the 4 weeks’ annual leave that is the EU minimum, rather than the 5.6 weeks’ minimum leave entitlement under the Working Time Regulations; however, the administrative burden of calculating this may well mean in reality that employers apply the new ruling to the full 5.6 weeks’ leave entitlement.

As well as the cost going forward, there is a real risk of receiving backdated claims from employees. However, there was some good news on this point: the EAT stated that where there is a gap of more than three months between the claims for “underpaid” holiday, this would ‘break the chain’ and those later dates cannot be claimed for. Employers must be reminded that bank holidays that have been paid at the incorrect rate will count when looking at whether an employee has taken annual leave in the preceding three month period, and that the parties in the Bear Scotland case were given leave to appeal on the point of retrospective payments.

We are still awaiting a judgment regarding the issue of commission and holiday pay. The case of Lock v British Gas is still to be heard by the Leicester Employment Tribunal and, whilst this would initially at least only bind public or quasi-public companies, if the tide is turning the way the Bear Scotland case suggests, it is entirely feasible that payments that are found to be intrinsically linked to the work would have to be included in holiday pay in the future.