Holiday Pay and Overtime

HOLIDAY PAY AND OVERTIME

A recent Employment Appeal Tribunal (“EAT”) decision has confirmed that certain overtime and allowance payments should be included when calculating a worker’s normal weekly pay for holiday pay purposes.

The EAT’s landmark ruling in the conjoined cases of Bear Scotland & others v Fulton & others, Hertel (UK) Ltd v Wood & others and Amec Group Ltd v Law follows a number of recent European Court and Employment Tribunal rulings which have sought to challenge the calculation of holiday pay. However, until now these decisions did not impact directly on UK employers. The EATs decision will therefore have a significant impact on how UK employers calculate holiday pay moving forward.

Overtime

There are three types of overtime:

  • Guaranteed compulsory overtime where even if a worker is not required to work overtime, an employer is liable to pay a worker for it;
  • Non-guaranteed overtime where a worker is obliged to work overtime if offered but an employer is not obliged to provide overtime or payment in lieu; and
  • Voluntary overtime where a worker cannot be required to work overtime and an employer does not have to provide it.

Guaranteed compulsory overtime is covered by the Working Time Regulations and employers have had to include it in their calculations for holiday pay for a long time. However, the position in relation to non-guaranteed overtime has been unclear until now.

These recent cases confirm that non-guaranteed overtime (in addition to guaranteed overtime) should be included in a worker’s holiday pay in relation to the four weeks’ statutory holiday entitlement per year. It is important to note that it does not apply to the additional 1.6 weeks’ holiday (as required by UK law) or any additional contractual entitlement.

The EAT did not reach any conclusion in relation to voluntary overtime. Employers should therefore proceed with caution as it may be possible that Employment Tribunals moving forward will interpret voluntary overtime as forming part of “normal” pay if a settled pattern has developed over a sufficient period of time. 

Allowances

The EAT held that holiday pay should include any allowances paid to workers which are intrinsically linked to the performance of tasks the workers were required to carry out under their contracts. This included the taxable element of a radius allowance paid to workers for time spent travelling to a number of different sites which is common in the construction industry. This may also include commission and bonus payments which will be considered in more depth in a separate case next year, for which we await judgment.

Summary of the EAT’s judgment

In summary, the EAT decided that:

  • Non-guaranteed overtime, in addition to guaranteed overtime, should be included in a worker’s “normal” remuneration when calculating their minimum four weeks’ statutory holiday each year. It does not apply to the additional 1.6 weeks’ leave or any additional contractual entitlement (unless contractually obliged);
  • Travel and other taxable allowances paid to workers for the performance of their duties should be included in holiday pay as they also form part of “normal” remuneration; and
  • Claims for underpayments of holiday pay have to be made to an Employment Tribunal within three months of the last deduction from wages and any longer breaks will be time-barred.

What does this mean for employers?

Initially it was thought that there would be the potential for substantial claims from workers for retrospective holiday pay. However, due to the EAT’s decision, claims for back pay are likely to be limited to the current holiday year as where there is a gap of more than three months between successive underpayments , the deductions will not be treated as the same series of deductions. As a result, the maximum risk to most businesses is likely to be backdated claims for the current holiday year only.

The decision does not provide any guidance on the mechanism for calculating statutory holiday pay to take into account overtime and allowances. However, workers who work non-guaranteed overtime will be entitled to receive different holiday pay depending on whether they are taking their statutory minimum four weeks’ leave or the additional 1.6 weeks’ leave and any additional contractual leave. 

Employers will also need to calculate a worker’s average weekly pay. The Employment Rights Act 1996 refers to a 12 week reference period which should be used in the first instance. However, if this is not reflective of the worker’s true pay, it may have to be calculated on a case by case basis.

Employers should therefore review their practices and contractual obligations in relation to overtime and allowances and the way they calculate “normal” pay for the purposes of calculating holiday pay for workers. Employers may need to consider their options to deal with the additional costs and administration this will incur.

The Government has announced a task force to assess the impact of this decision as a matter of urgency. Also, the EAT has granted permission for the parties in the above cases to appeal to the Court of Appeal on all aspects of the decision as it was acknowledged that the decision is of considerable public importance. We await any further developments with interest but in the meantime this decision is “good law”.

What do employers need to do now?

Firstly you need to take advice to assess the situation with regard to any non-guaranteed overtime that you may offer.

If you have non-guaranteed overtime, you have four options:

  1. You can decide whether you are going to do nothing (which could result in a claim or at least impact on employee relations and does mean that you are not limiting your liability moving forward);
  2. You could pay all leave at the same rate (i.e. on the average of relevant pay over the previous 12 weeks);
  3. You could have a two tier method of calculating holiday pay (i.e. the average of relevant pay over the previous 12 weeks for the first 4 weeks holiday, and then a flat “basic rate” for the remainder); or
  4. You could pay an additional percentage of all non-guaranteed overtime undertaken by the worker, reflective of their statutory annual leave.

Are there any ways to minimise the financial impact of this ruling?

There are some options to lessen the impact of this ruling, for example:

  1. You could undertake an audit of your overtime use/risk and consider changing contracts of employment to provide for voluntary rather than non-guaranteed overtime. However, you will need to think carefully about the practical implications of removing the obligation of workers to accept overtime before doing so;
  2. You can limit or refuse holidays after periods of peak overtime (if your business has defined peaks); or
  3. You could use agency or bank staff to cover periods traditionally covered by overtime. 

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