Today’s ruling in the Employment Appeal Tribunal (EAT) has confirmed that holiday pay should include overtime pay. This overturns the UK’s previous interpretation of the law from 1998 which stated that only ‘basic rate’ pay should be used for the calculation of holiday pay. This is on the basis that UK businesses have been incorrectly interpreting the EU-wide Working Time Directive and the UK Working Time Regulations 1998.

The EAT ruling relates to the case of Bear Scotland v Fulton (and conjoined cases) and creates widespread implications for businesses who pay overtime to their staff.

What is not clear from the EAT ruling is whether UK businesses will be liable for backdated holiday pay claims brought by workers. If UK businesses are indeed liable then this is likely to open the floodgates for approximately 5 million workers to bring claims for more holiday pay. This is likely to have a devastating financial impact on UK businesses, particularly small businesses. In view of this, the Federation of Small Business has urged the government to bring in emergency legislation to prevent any possibility of backdated claims.

Needless to say, the government has spoken out against the ruling and has confirmed that a taskforce will be set up to assess the implications. Given the financial implications for businesses, it is likely that the ruling will be appealed. However, a final decision could be years away.

In the meantime, employers may wish to rethink how they calculate workers' pay and/or reduce the availability of overtime.

Employers should be aware that a failure to follow the EAT ruling may result in unlawful deduction from wages claims and/or breach of contract claims by workers. Consequently, employers are advised to review and amend their policy on the calculation of holiday pay.

For more information on how this may affect your business, please contact a member of our Employment team.