A recent Employment Appeal Tribunal decision, which held that overtime must be included when calculating holiday pay, has left employers with a major decision to make regarding their holiday pay obligations in the run up to the festive holiday season.
On the 4th November the Employment Appeal Tribunal (EAT) delivered a judgment regarding the calculation of holiday pay which will have major implications for employers whose workers regularly work overtime. The background to the decision is the right of UK employees and workers to receive holiday pay. This right comes from the European Working Time Directive (WTD) which states that all workers are entitled to 20 days holiday each year. In the UK, this right is set down in the Working Time Regulations 1998 which explain how holiday pay should be calculated and that UK workers are entitled to 28 days holiday each year.
There has been uncertainty about whether the way holiday pay is calculated in the UK is compliant with the WTD following workers challenging their holiday pay in the European Court of Justice (ECJ). The ECJ has made it clear that workers should be paid their ‘normal remuneration’ during their holidays so they do not suffer any financial disadvantage by taking a holiday.
The EAT, in the case Bear Scotland Ltd v Fulton, had to decide whether the employee’s holiday pay should be calculated by reference to their basic pay alone or include an amount for overtime that the employees regularly worked. There are 3 types of overtime:
1. Guaranteed or compulsory overtime – where the employer is obliged to offer and pay for overtime even if the employee does not work it.
This type of overtime already has to be included in calculations of holiday pay under the WTR and therefore there was no dispute about this.
2. Non – guaranteed overtime – where the employer is not obliged to offer or provide any overtime but the employee is obliged to work the overtime if offered.
3. Voluntary overtime – where the employer does not have to offer overtime and the employee is under no obligation to work the overtime if they are offered it.
The EAT had to decide whether non- guaranteed overtime should be included in the calculation of holiday pay. It decided that:
• The WTD does require that non- guaranteed overtime should be included in holiday pay calculations as this is part of a worker’s ‘normal remuneration’ and the WTR can be interpreted to require U K employers to do this.
• Other allowances directly linked to a worker’s work and which are more than their expenses (such as a travelling time allowance) should also be included in the calculation of holiday pay.
• Underpaid holiday pay cannot be claimed by workers where the last payment is more than 3 months ago.
So what does this mean for employers?
Employers need to assess their liability for potential claims for back dated holiday pay from their workers. This assessment should take into account:
• Do they have workers who work either non guaranteed or voluntary overtime? Although the EAT decision only dealt with non -guaranteed overtime, if a worker regularly works voluntary overtime there is a risk that a court or Tribunal could decide that this overtime should be included in the holiday pay calculations as well.
• How many of their workforce work non -guaranteed or voluntary overtime?
• How much of each worker’s pay is made up of overtime payments? ( the more made up of overtime payments, the larger the potential liability)
• Do they require workers to take bank holidays as part of their annual leave entitlement? If so, it will be less likely that there will be more than 3 months between payments of holiday pay and therefore more likely that a worker will be able to put together a series of deductions based on underpayment of holiday pay going back more than 3 months.
Once the assessment has been undertaken, employers will need to decide how to deal with the potential liability. As this decision by the EAT is being appealed to the Court of Appeal, it is possible that it could be overturned and so employers may want to adopt a ‘wait and see’ approach. However, the 3 month limit on backdated claims is also part of that appeal. There is a risk if the Court of Appeal upholds the decision regarding overtime payments, but overturns the 3 month limit, that workers will be able to bring backdated holiday pay claims going back to 1998 when the WTR became law.
Employers who are concerned about substantial historic liabilities may feel the safest course of action is to start calculating holiday pay to include non- guaranteed overtime payments (and voluntary overtime where regularly worked) now. Such payments will ‘break’ the link between deductions and mean that workers will not be able to claim for historic underpayments of holiday pay going back several months or even years.
This is a difficult call to make. For advice on this difficult area get in touch with Integra at contact@integralegal.co.uk or on 0115 987 6790 now.