Overtime to be included in holiday pay

Important new case on holiday pay

On 4 November 2014, the Employment Appeal Tribunal handed down a landmark judgment in the cases of Bear Scotland –v- Fulton, Amec –v- Law and Hertel –v- Wood. The judgment could have severe implications for businesses who operate paid overtime practices.

The judgment means that employers need to include non-guaranteed overtime pay when calculating employees’ holiday pay. Non-guaranteed overtime is overtime which the employer does not have to offer but the employee must work if offered.

The Working Time Directive, implemented in the UK by the Working Time Regulations 1998, entitles employees to 4 weeks leave. However, it does not confirm how the pay should be calculated. Therefore, only basic pay currently counts when holiday pay is calculated. The Regulations also entitle employees to an additional 1.6 weeks leave in addition to the 4 weeks under the Directive.

Under the Regulations, employees are entitled to pay for annual leave at a rate of one week’s pay for one week’s leave. The way that this is calculated depends on certain factors such as whether or not a worker has normal working hours.Other factors, such as overtime, bonuses or commission are excluded from statutory holiday pay. However, the Court of Justice of the European Union (“CJEU”) and the Supreme Court previously ruled in the case of British Airways v Williams 2012 that airline pilots should receive normal pay when on holiday, and that this included all elements of remuneration, such as flying pay supplements and not just basic pay so that they were in a comparable position when on leave.

Similarly, in Lock v British Gas Trading Ltd [2014] CJEU C 539/12, the CJEU held that where a worker’s remuneration includes commission in respect of work they are obliged to carry out as part of their overall employment, this element of pay, which is in effect the worker’s usual or typical average pay, should be taken into account when calculating a worker’s holiday pay.

In cases of Fulton, Law and Wood, the employees were required to work overtime and normally did so, although it was not guaranteed. The Employment Appeal Tribunal (“EAT”) held that if an employee is required to work overtime, then overtime pay should form part of an employee’s normal remuneration and should therefore be taken into account when calculating holiday pay. This is also the case with other payments which form part of the normal remuneration, such as shift allowances and comparable payments.

The calculation for holiday pay will apply to only the basic 4 weeks’ leave granted under the Working Time Directive. It will not apply to the additional 1.6 weeks under regulation 13A of the Working Time Regulations.

The EAT also confirmed that claims for backdated pay could be paid but only for a limited period, so not more than 3 months after the last incorrect payment or since the last holiday taken. Therefore, in most cases, claims for arrears of pay will be out of time if there has been a break of more than 3 months between successive underpayments.

The claims are being appealed to the Court of Appeal. There are also a number of very important questions which remain unanswered such as how far back claims can go if there is no three month break in underpayments of holiday pay, whether one off bonus payments will be argued to count as remuneration for holiday pay purposes and whether the 12 week averaging approach used for calculating weekly pay, which is the method that is normally used in employment cases provides the appropriate “reference period” for calculating holiday pay – the ECJ in Lock suggested 12 months.

Future implications for employers

As a result of this judgment, employers will first of all have to decide what is to be included when calculating holiday pay.

They will then have to decide whether to pay the holiday pay relating to the 4 weeks leave required under the Directive and the additional 1.6 weeks leave required under the Regulations at the same or different rates. It may well be easier for employers to pay all holiday pay at the same rate to avoid any administrative difficulties.

If employers currently offer employees ‘non-guaranteed’ overtime (overtime which an employee is required to perform if requested), then this could mean increased liability for holiday pay. Therefore, employers may wish to consider other alternatives, such as offering voluntary overtime instead, or using bank or agency staff to cover overtime.

Bearing in mind the media attention the cases have attracted, it is only a matter of time before employees start to challenge their holiday pay calculations, particularly with reports of some Claimant based firms running ‘no win no fee’ campaigns asking employees whether they have been underpaid holiday pay.

We are advising a number of employers on the potential implications of the case, as well as other holiday pay cases, and would be happy to discuss your specific requirements in more detail. We can help you to assess the impact of the cases on your business through our comprehensive holiday pay audit, calculate the likely costs and suggest strategies to mitigate the risk of multiple claims from employees for unpaid holiday pay going back many years.

Please feel free to call us on 0207 956 8699 or email info@rllaw.co.uk.