This week’s UK employment appeal tribunal (EAT) ruling on people working overtime claiming extra holiday pay sent shockwaves through the political establishment and the media. It has left businesses scratching their heads over the true cost of annual leave.

However, further detailed analysis by Croner, Wolters Kluwer’s HR and employment information and advisory service, reveals that the situation may not open the floodgates as predicted in much of the press. Commenting on the decision in Bear Scotland v Fulton by the Employment Appeal Tribunal, Richard Smith, Wolters Kluwer’s employment law expert and a business lawyer, says: “If you look in detail at the EAT’s decision, any tribunal action alleging an underpayment of holiday pay must normally be brought within three months, or within three months of the last deduction where a series of underpayments is alleged by an employee – and the EAT has stated that any underpayments in such a series cannot be separated by more than three months.”

“At the same time, liability is limited to only four weeks of a worker’s annual entitlement to leave (a minimum of 5.6 weeks). Employers will probably want to take advantage of the interpretation of past liability within the tribunal’s judgement. But they should remember that the parties to the Bear Scotland v Fulton case have been given leave to appeal, so things could change again. Where a worker is regularly required to work additional hours, employers should look back over a representative period and pay annual leave based on an average of the earnings received.”

“This could be achieved by taking an average of earnings received over the 12 weeks prior to a period of leave. In future, employers could be encouraged to adopt a method of calculating holiday pay for workers which includes pay that is normally received. Although this is only necessary in relation to four weeks out of a worker’s total annual leave entitlement of 5.6 weeks, to run two methods of calculation would be an extra administrative burden. As a result, employers might choose to adopt the averaging approach to all annual leave payment calculations in the future. “This could well reduce the burden that people are suggesting will be placed on so many employers.”