The Employment Appeals Tribunal (EAT) has handed down its judgement in the con-joined appeals of Bear Scotland Ltd v Ors; Hertel (UK) Ltd and Amec Group Ltd relating to overtime and holiday pay.

The summary is as follows:

  1. The Working Time Regulations (WTR) 1998 should be interpreted to include contractual but non-guaranteed overtime when an employer is calculating a worker’s holiday pay. Such an interpretation is consistent with Article 7 of the Working Time Directive. Therefore, if you require your workers to perform overtime under their contract but do not guarantee them any minimum hours, such hours worked will need to be accounted for by payroll. If you operate a genuine voluntary overtime policy and in practice this happens on an ad hoc basis and there is no settled pattern of work, such additional hours worked should arguably be excluded from holiday pay computation.
  2. In order for a worker to bring a claim for backdated holiday pay which includes their overtime earnings, there must not be a gap of more than three months between a series of deductions. The time limit is not from the date of the last deduction. If there is such a gap, workers do not have a right to backdated compensation.
  3. When calculating how much holiday pay is owed to a worker, UK law requires the reference period for averaging fluctuating pay to be 12 weeks from the date when a worker takes annual leave.
  4. A payment in lieu of notice (PILON) does not need to include overtime pay provided that “normal working hours” are clearly defined in the employment contract, rather than what actually happened after the contract was made (e.g. if the worker worked overtime in practice).
  5. Travel time payments (TTP) or radius allowance (RA) paid to workers for travelling from their home to a worksite is time spent that is linked to work. This should be included in the calculation of holiday pay and taxed as it is part of their normal remuneration and not regarded as expenses.

The employers have been granted leave to appeal to the Court of Appeal. The Government is also putting together a task force to assess the impact of the decision. The legal position remains unsettled.

Claiming backdated pay

In the meantime, any worker bringing a backdated holiday pay claim must demonstrate that there was no gap of more than three months since they were last owed holiday pay. This may be more difficult to prove in practice unless a worker has been taking annual leave regularly throughout the year. The EAT also stated that workers cannot pick and choose which holidays they have taken first (i.e. the minimum four weeks guaranteed by European law to which the above judgment applies or the 1.6 weeks of additional leave granted by the UK government). Many employment contracts will, however, state that workers are deemed to have taken their statutory minimum entitlement first.

Minimising future liability

It is always a challenge for the hospitality sector to have the correct staffing levels due to fluctuating occupancy levels and seasonal demands. While operating a Time off In Lieu (TOIL) policy is a possible way around the WTR, many low paid workers will only work overtime for additional remuneration. Hoteliers and restaurateurs will therefore need to weigh their operational requirements very carefully against the legal risks of the above judgement.

In order to have a reliable workforce that you can call upon, contractual overtime will be needed in the employment contract but this comes with a holiday pay price tag. From now on, workers will also be more vigilant about bringing claims within the three month time limit. If you operate a voluntary overtime policy, you may be “safe” but overtime that is regularly worked in practice could still increase your legal risks of claims.

This is a good time to review your overtime practice and operational needs - should this be voluntary, contractual or guaranteed – and budget for any additional holiday pay costs, where applicable. You should also check your employment contracts to ensure that there are appropriate contractual wording and clear contractual rules on holiday accruals and utilisation and how PILONs, contractual sick pay and pensionable salary will be calculated.