Holiday Pay to include “non-guaranteed” overtime under Working Time Regulations

The Employment Appeal Tribunal Decision in the combined cases of Bear Scotland Ltd v Fulton & Baxter, Hertel (UK) Ltd v Wood and Amec Group ltd v Law

Judgment handed down by the EAT: 4 November 2014

By the time you read this legal update you will probably have seen all the media coverage on the decision by the Employment Appeal Tribunal that overtime payments should be included in the calculation of holiday pay. It is being touted as a “workers’ victory” by Unions and highly damaging to trade and industry by business groups. But is that right, and, if so, to what extent?  

Whilst the journalists write the headlines and the lawyers scrutinise yesterday’s 48 page Judgment, employers and employees simply want certainty about what should be included in holiday pay. That certainty is likely to be some way off (perhaps years) as the EAT Judge has given permission to appeal his Judgment to the Court of Appeal. He granted permission on the basis that it is a matter of public importance. The Business Secretary has also announced that the government will set up a task force to urgently assess the impact of the ruling.

So what should employers, and what can employees, do in the meantime? Here is our take on the situation.

Background

The European Working Time Directive provides that full time workers should be given four weeks paid annual leave per year. Part time workers are to be given a pro rata amount of leave. The holiday pay should be based on “normal remuneration” averaged over “a representative pay period” (more on this below).

The Working Time Regulations is national legislation which must implement the Working Time directive into UK law. The UK’s Regulations are more generous to workers in that it provides full time workers with 5.6 weeks of annual leave per year, 8 days more than the minimum stipulated by Europe.

Up until now UK employers have been calculating their employee’s holiday pay based on their basic salary only. Where an employee’s remuneration varies from week to week, say because they work different hours, UK employers have been calculating their week’s pay based on an average of the previous twelve weeks earnings. This is how UK’s Employment Rights Act 1996 tells us to make the calculation. 

The Test Cases and the EAT Decision

Employees of three companies – engineering company, Amec, industrial services firm Hertel and maintenance company Bear Scotland – brought test cases arguing that the UK has been misinterpreting European legislation and that their holiday pay should have be based on their “normal remuneration”, i.e. that their holiday pay should have included their overtime payments and other payments associated with their work.  The EAT agreed with the employees.

The key elements of this landmark decision are that:

  • Workers are entitled to be paid their “normal remuneration” and that should include “non-guaranteed” over-time. (Note the Judgment distinguishes between ‘non guaranteed’ and ‘voluntary’ over time).  
  • Payments for travelling time which is intrinsic to the role performed by the employee (i.e. not the normal commute to work) should be included in the calculation.
  • This ruling only applies to the four weeks leave granted under the European Working Time Directive. It does not apply to the extra 8 days leave UK workers enjoy under the Working Time Regulations. Pay for those extra days leave can still be paid at basic salary only.
  • Claims for unpaid holiday pay will be considered out of time if there is more than three months gap between the underpayments. This is a relief for employers who feared underpayment claims stretching back years.

What other key decisions are likely in the near future?

The hearing on whether UK employers should be including sales commission in holiday pay will be heard in February 2015. This follows the Advocate-General’s Opinion in the case of Lock v British Gas Trading Ltd that sales commission should be included. The Opinion is in line with other European decisions that the purpose of annual leave is for rest and recuperation. Anything that discourages workers from taking their holiday, such as reduced pay, is essentially a health and safety issue and is contrary to an important principle of European social law.

It is highly likely that the Tribunal hearing the Lock case will be decided in line with Bear Scotland and determine that sales commission should be included in holiday pay.  

What should employers do now?

Employers are urged to consider with their legal advisers how to:

  • Make swift preparations to increase their workers holiday pay in line with the EAT Judgement.
  • Handle potential claims from employees for backdated holiday pay.
  • Budget for other elements of pay which should also be included in holiday pay in the future, such as sales commission and standby payments.  
  • Decide what ‘reference periods’ will need to be taken into account when calculating holiday pay. Unfortunately the EAT Judgment does not clarify what this should be. In the case of sales commission (and possibly overtime) should it be the past 12 weeks (as provided by UK law) or the past year to take into account the peaks and troughs in sales or customer demand?

If you would like further information or any help with the urgent tasks above, contact the employment team, Deborah Scales or Sally Cox on

deborah.scales@hcsolicitors.co.uk

sally.cox@hcsolicitors.co.uk

T: 01733 882800

Article by Deborah Scales

Go back

Share

Subscribe to our RSS feed to receive all of our news updates.

This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.