John Cridland Director General of the CBI is unhappy. Whatever glow he acquired over the half term holiday has disappeared with the publication of the decision of the Employment Appeal Tribunal in Bear v. Fulton, which deals with the calculation of holiday pay. He thinks the decision will costs millions of pounds and bankrupt small firms.

But is he right?

Not necessarily.

Traditionally UK employers have calculated holiday pay solely by reference to basic pay, excluding any overtime pay. A straight forward reading of S.234 of the Employment Rights Act 1996 would seem to indicate that this is the correct approach.

However, in the case of Lock decided earlier this year, the ECJ held that as a matter of EU Law commission payments had to be taken into account when calculating holiday pay. Lock creates very practical problems of implementation. A commission based employee will normally receive commission whilst on holiday from deals done earlier in the year. However she will suffer a dip in take home pay at a later point because she did not earn commission while on holiday. The practical problem arising from Locke is how to identify and compensate for the dip.

The principle underlying Lock was even more significant: it was that workers should not suffer a dip in take home pay whilst on holiday since this would act as a disincentive to take the holiday which EU law regards as a health and safety issue.

That being so, the writing was on the wall for employers with regard to compulsory overtime. It is wholly unsurprising that the EAT held in Bear that the Lock principle applied to compulsory overtime and many employers have been accruing for this since Lock.

The employers’ complaint post Bear is that they have for many years been following S.234(1) which the EAT has now rewritten. It regarded itself as bound to implement EU law even if that meant rewriting UK law. This aspect of the matter may be addressed through appeal to the Court of Appeal and then the Supreme Court. Or it may be addressed through the ballot box in 2017. But either way resolution is some distance away.

Meantime, will John Cridland’s fears materialise? There are two issues. The first is holiday pay obligations going forward and the second is the question of arrears.

As to holiday pay going forward, the issue of what should be taken into account is now clear at least as a matter of principle. The UK government is not going to intervene in the short term because it is bound by EU law and any appeal to the Court of Appeal is at least a year away. Also, there are many ways for employers to mitigate the effect of Bear. For a start, it applies to only compulsory overtime. In addition, it is open to employers to vary the contract so as cut pay /allowances to take into account increase holiday pay costs.

As to arrears, extravagant fears have been expressed about backdated claims going back years and costing millions. As will be seen however, the judgment of the EAT in Bear calms these troubled waters waters.

According to S.27(1) of the Employment Rights Act 1996, claims for under payment of holiday pay have to be brought within 3 months of the underpayment; or within three months of the last of a series of underpayments.

The concern is that historic underpayments going back as many as 16 years might be part of a series of underpayments ending within 3 months of a claim.

However, the EAT noted that under Regulation 13 and 13a of the Working Time Regulations workers (including employees) are entitled to a total of 28 days annual leave per annum.

Regulation 13 implements the 20 days minimum required by EU Law and Regulation 13A provides for an extra 8 days as a matter of UK law. On any view, payment for the extra 8 days is governed by S. 234(1) not by EU Law.

The employers argued in Bear that payment in accordance with S.234(1) for the Reg 13A days would be sufficient to break the chain and the EAT accepted this argument. Moreover it also seems to have held that the Reg 13A days were “additional leave” and must be interpreted as being the latest of the days holiday taken in any given year.

Therefore due payment of holiday pay for S.13A days will prevent any previous days holiday being part of a chain extending to the point 3 months before the claim. This aspect of the EAT’s decision may itself be successfully appealed. By the time that happens however time will have passed. And if in the meantime, an employer has paid in accordance with Lock/Bear those payments will themselves have broken the chain.