Jane Crosby from Law firm Hart Brown looks at the landmark Employment Appeal Tribunal which has given employees the right to have their overtime rate factored in when calculating how much holiday pay they should receive.

On the 4th November the Employment Appeal Tribunal finally ruled in the cases of Wood & Others v Hertel (UK) Limited and Fulton v Bear Scotland Ltd & others relating to the UK’s interpretation of the European Directive on the issue of whether non – guaranteed overtime should be included in holiday pay.

It has already been determined in the case of Lock v British Gas Trading Ltd that commission payments should be taken into account when calculating statutory holiday pay so this is another setback for employers.

In a comprehensive judgment the EAT has decided in favour of the workers that normal holiday pay will include non guaranteed overtime and payments for travel time which is paid for by the employer which may also be included in the calculation.

Currently employers have been paying holiday pay which is based on an employee’s basic pay but this will need to change after this ruling and at present the calculation will only cover the four week period under European Law and not the 5.6 weeks under UK law.

A worker is currently entitled to raise a claim but must do so within 3 months from the date of the unlawful deduction but there has been concern that this ruling may mean claims could potentially go back to 1998 when the Working Time Regulations first took effect. Also workers may be able to able to bring a contractual claim in the civil courts for underpayments up to six years.

This judgment could mean a tidal wave of backdated holiday pay claims and the Government is obviously very concerned about the impact of the judgment because Vince Cable has said, “Government will review the judgment in detail as a matter of urgency.

"To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”

Unions are in support of the decision as many of their workers regularly do voluntary overtime and this decision will mean that they will not be penalised in the future if they take holiday.

It is not the end of the story because this decision may be appealed to the Court of Appeal as leave to appeal has been granted by the Employment Appeal Tribunal, but Employers should urgently review their contracts of employment and also consider their potential exposure by acting now to minimise the impact of this decision.

It is difficult to judge the impact on employers at this stage but claims could run into millions of pounds which would have a significant impact on small businesses who often don’t have the resources to challenge such claims.