A landmark decision in Bear and conjoined claims could have an impact on DB schemes, depending on how their definition of “pensionable salary” is worded. The employment appeals tribunal (EAT) ruling that compulsory overtime is part of “normal remuneration” means that employers must include an amount in respect of both guaranteed overtime and mandatory (but non-guaranteed) overtime in calculating holiday pay.

The decision has implications for employers which require their staff to work overtime when it is available, and could also apply to other similar variable payments which meet the test of “normal pay” for the purposes of Article 7 of the Working Time Directive (the Directive). However, an added complication is that payment of this enhanced holiday appears to apply only in respect of the four weeks’ holiday pay required under the Directive, and not the additional 1.6 weeks’ holiday provided under the Working Time Regulations (WTR). This is because the additional 1.6 week period under the WTR remain subject to the “week’s pay” provisions of the Employment Rights Act 1996 under which only compulsory, guaranteed overtime is taken into account in respect of workers who work normal hours.

Retrospective effect

However, there is some good news for employers in that the potential for retrospective claims has been restricted. The EAT held that where there has been an interval of more than three months between any past underpayments of holiday pay, claims for underpayments before the three month gap will normally be out of time. In addition, employees cannot choose which periods of holiday will be paid at the higher rate and the first four weeks’ leave in any year will attract the enhanced pay element unless the employer directs otherwise. However, if an employee regularly took one week’s holiday every three months, there is a potential claim back to 1998 when the WTR came into force.

Appeal likely

Leave has been granted for an appeal to the Court of Appeal. The Government has announced that it will set up a “task force” to assess how the impact of the decision on businesses may be limited, although there is as yet no published timescale for the resultant report.

Comment

The decision has implications for employers requiring their staff to work paid overtime, or those who offer other forms of regular enhanced pay such as travel allowances compensating for travel time (rather than travel expenses), as these could now be considered part of the employee’s “normal pay”.

This could have a knock-on effect on the pensionable salary calculation in DB schemes, depending on how the relevant definitions are expressed in the scheme rules. Where schemes use variable pay, rather than basic pay, in their definition of pensionable salary, it is possible that past contributions and the benefits accrued in respect of those contributions could have been too low.

Scheme rules should be checked and trustees with schemes calculating pensionable salary on the basis of variable pay may need to seek professional advice.