Holiday pay and overtime – issues for the accountant

It is not every day that accountants have to worry about the effect of Employment Appeal Tribunal decisions but the judgement in the Bear Scotland case is an exception.

Some of the headlines that greeted the decision were: 'Landmark ruling on holiday pay' 'Ruling may affect millions of workers'. The case is certainly an important one for employers who regularly pay amounts to their workers in addition to their basic pay. Overtime payments are the most common example but other amounts which are intrinsically linked to the tasks performed by an employee may need to be included in the calculation of holiday pay.

The government has recognised the importance of the recent Tribunal decision and the Business Secretary, Vince Cable announced the setting up of a taskforce. This taskforce will discuss whether the business impact of the decision can be limited.

The Bear Scotland case was in fact three cases which have been heard together by the Employment Appeal Tribunal. In summary, the cases concerned the conflict between the EU Working Time Directive and the UK Working Time Regulations 1998. In these cases, employees were required to work overtime if requested by their employers. The Tribunal referred to this type of overtime as 'non-guaranteed overtime'. Following the principles set out by the Court of Justice of the European Union, the Employment Appeal Tribunal has decided in the context of non-guaranteed overtime:

• overtime payments must be taken into account in the calculation of holiday pay if there is a settled pattern of work• if the amount of overtime varies but is regularly paid, overtime payments must also be taken into account on the basis of an average taken over a 'reference period' (the reference period was not defined by the Tribunal but the 12 week period referred to in the Employment Rights Act may be appropriate).

The employers have a right to appeal the judgement. However, the Tribunal did note that any appeal against the principle of including regular non-guaranteed overtime payments in holiday pay is unlikely to succeed.

On a more positive note for the employers, the Tribunal decided the ability of employees to make back claims for underpaid holiday pay was severely limited by how the three month time limit for making a claim operates. However the unions representing the workers can appeal this part of the judgement.

Given the possibility of the judgements being overturned one could argue that an employer does not need to do anything at present. But clearly it would be prudent to review pay arrangements now to see the potential financial costs of the decision.

And that's where accountants come in. Your payroll clients will certainly expect you to give some information and advice about the effects of the case. Advice on this issue will also be beneficial to your other clients as well.

It's no surprise then that we have produced a letter to send to your clients. Details are here.