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Holiday pay – the great miscalculation
Following the Judgment of the Employment Appeal Tribunal in Bear Scotland v Fulton (UKEATS/0046/13/BI) it is likely that millions of employees have been underpaid their holiday pay.
The EAT decided that EU law requires that pay for both guaranteed and non-guaranteed overtime to be taken into account when determining the normal rate of pay to which a worker is entitled when taking the 4 week’s paid holiday provided for by the Working Time Directive.
This does not however extend to the additional 1.6 week’s leave provided for under UK law.
The EAT concluded that Working Time Regulations 1998 must be re-written as follows:
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) The provisions referred to in paragraph (2) shall apply–
(a) as if references to the employee were references to the worker;
(b) as if references to the employee's contract of employment were references to the worker's contract;
(c) as if the calculation date were the first day of the period of leave in question; and
(d) as if the references to sections 227 and 228 did not apply and, in the case of entitlements under regulation 13, section 223(3) and 234 do not apply.
In calculating holiday pay, employers must also take into account:
- Taxable allowances paid for travelling time and inconvenience but not travel expenses;
- Productivity and performance based payments.
Although employees may have suffered underpayments since the introduction of the Working Time Regulations 1998, they will not generally be able to make a claim for underpayments occurring more than 3 months ago. In particular, underpayments which, despite being of same kind, are more than three months apart will not normally constitute a series of deductions from pay under s.23 of the Employment Rights Act 1996.
Permission to appeal to the Court of Appeal was granted in light of the public importance of the case.
The following questions remain unanswered:
Where pay fluctuates from week to week, what period of time should be taken into account in determining an employee’s average pay? Should it be 12 weeks as provided for in s.223 of the Employment Rights Act 1996 or ‘a representative period’ as suggested by the Court of Justice of the European Union in Lock v British Gas Trading Ltd  ICR 813?
Will employees be able to circumvent the time limits for bringing holiday pay claims by bringing claims for breach of contract instead?