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The Employment Appeal Tribunal has, this week, handed down judgment in a ground-breaking decision confirming that businesses should factor in overtime when calculating holiday pay.

The key part of the decision in Bear Scotland and others v Fulton and others stated that workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments.

This ruling has widespread implications for businesses, especially those in the hospitality sector, where workers undertake overtime above their contracted hours on a regular basis.

Prior to this case, the general position was that holiday pay should be calculated using basic pay. However this decision follows a line of recent European decisions indicating that holiday pay should be at a similar level to ‘normal’ pay and must include all elements of pay that are ‘intrinsically linked’ to their duties, such as commission payments. Overtime will now be included within this.

Although this decision does seem fair to a degree, this change in the law could result in a huge financial penalty and an administrative nightmare for employers; especially if employees decide to claim back pay for previous underpayments. However, the ruling did suggest that employees should only be able to claim back pay for a limited period.

Business groups are already reporting strong concerns about this decision suggesting that most employers will have no alternative but to curtail the availability of overtime which will result in a bigger blow to the affected employees and businesses generally.

Vince Cable has confirmed that a taskforce has already been set up to assess and review the ruling as a matter of urgency and to discuss how they can limit the impact on business. The decision may also be appealed to the Court of Appeal.

As always, we will keep you up to date with any further developments but if you require any advice on how this decision affects you or your business, please do not hesitate to contact a member of our employment team.

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