The Employment Appeal Tribunal (EAT) held a three day hearing in late July, following which it will rule on whether, both for the future and historically, employers should include average overtime in holiday pay.

Background

Under current UK law, for most employees overtime is only included in holiday pay if it is both compulsory and guaranteed.

The Court of Justice of the European Union (CJEU) has decided that the Directive which gives workers the right to 20 days’ paid holiday requires that when on holiday workers should receive,  in addition to their basic pay, any supplements, such as for performing a role; any allowances, which are intrinsic to their role or which reflect their status; and average commission earnings (see our previous e-brief).

In applying these CJEU decisions, several employment tribunals have decided that workers should be paid average overtime earnings whilst they are on holiday. Some of these cases have been appealed to the EAT. One of the main cases, Neal v Freightliner, has settled, but three other cases listed for the same hearing still went ahead in late July. Those three cases are: Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others.

Next steps

One possible, and perhaps most likely, conclusion of the EAT hearing, (Judgment is still pending) is that the inclusion of overtime in holiday pay will be referred to the CJEU to decide. This will result in further delay and uncertainty before the issues can be resolved.

Other issues which remain are:

  • whether the Working Time Regulations 1998 (WTR) (which implement the Working Time Directive) can be interpreted so as to give effect to the CJEU decisions referred to above;
  • if so, the period of time over which average pay should be calculated; and
  • whether the average pay is limited to the basic 20 days’ holiday allowed under the Directive or also applies to the 28 days’ leave provided for in the Regulations.

If the UK courts do allow the Regulations to be interpreted to give effect to the CJEU decisions, then this new interpretation will have retrospective effect, which means that employers could be liable for the difference between normal pay and average pay historically as well as in the future.

If the UK courts do not allow the WTR to be interpreted in this way, then the historical element of those claims might instead become the liability of the Government for failing to implement EU law properly, though employers which are “emanations of the state” could face claims based on the Directive itself.

Comment

Unions are already filing claims for backdated holiday pay, and we are seeing “no win no fee” lawyers talking up the potential value of claims. Though these claims are likely to be stayed pending the outcome of the appeal cases, there have already been some high profile settlements.

Before companies know how to react, and whether they should make provision for any claims, they need to understand their exposure. We have helped a number of clients to conduct audits of their working arrangements and payment arrangements to understand their exposure and how it might be mitigated. As the sums involved are potentially significant – in some cases eight figures – this is a process which needs to be conducted with care, and ideally subject to legal privilege so as to avoid creating potentially damaging disclosable documents.