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Three construction cases herald new rules for calculating holiday pay

A landmark judgment handed down on 4 November, concerning three construction cases, will majorly impact how employers are required to calculate holiday pay.

Estimates suggest that up to 5 million employees may be entitled to some form of back payments and, going forward, higher rates of holiday pay. So, what effect will this have on employers’ obligations, and what should construction companies do now?

In Bear Scotland & others v Fulton & others (heard jointly with cases against Hertel (UK) Ltd and Amec Group Ltd), the Employment Appeals Tribunal had to decide whether overtime pay and travel allowances should be included when calculating a week’s normal pay for holiday pay purposes.

As long ago as 2004 the EAT had made clear that guaranteed overtime must be included in holiday pay calculations, but these cases revolved around overtime that was not guaranteed, but that workers were expected to work when asked. 

The EAT has held firstly that non-guaranteed overtime, where it is nevertheless regularly required by the employer, amounts to “normal remuneration” and should be included. The case is silent on whether truly voluntary overtime – where the employee can choose whether or not to work the additional hours – will fall into this category. 

However, it would be safest (and easiest, for calculation purposes) to assume that all overtime should be included.

Secondly, whilst workers in the UK are entitled to a minimum 5.6 weeks (28 days, for those working a five-day week) holiday each year, the decision applies only to four weeks of that holiday.  Employers could pay the remaining 1.6 weeks’ holiday at basic pay rates only, but the administrative complications of doing so may outweigh the financial benefits.

In addition, travel and other taxable allowances (in this case, radius allowances and travelling time payments) paid to workers should also be included in holiday pay. 

How much is this going to cost employers? 

Business groups have already complained about the financial burden and there was concern that claims for back pay could go back six years, or even to 1998 (when the Working Time Regulations were implemented) – but the EAT has said that a gap of more than three months will break continuity in a series of holiday pay claims, meaning that most employees will probably not have a huge claim for back pay. However, it’s highly likely that this limit on workers’ ability to claim will be challenged. 

This is unlikely to be the end of the story: the government has announced a new task force to assess the impact of the ruling and the EAT has granted permission to appeal to the Court of Appeal.  Until any appeal is decided, the costs of the decision will remain unclear.  In the meantime, any employer who does not already include overtime and taxable allowances when determining holiday pay should do so.

Paul Callaghan and Rachel Farr are employment lawyers at Taylor Wessing

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