The Employment Appeal Tribunal has handed down judgment this week in three significant cases regarding the calculation of holiday pay and inclusion of overtime and other ancillary payments (Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others). In each case, the workers were required to work overtime (i.e. it was not voluntary) however their statutory holiday pay was not calculated to take overtime pay into account. The main issue before the EAT was therefore whether remuneration not included in their basic salaries (overtime and some travel payments) should be included in the calculation of holiday pay.

Legal Background

The cases arise as a result of an apparent conflict between European and English law on the meaning of holiday pay. The European Working Time Directive (the “EU Directive”) entitles workers to 4 weeks’ leave but does not specify how pay should be calculated. The EU Directive is implemented in the UK by the Working Time Regulations 1998 (the “WTR”). Under the WTR, workers are entitled to 5.6 weeks’ leave and must be paid at the rate of “a week’s pay” for a week’s leave. The statutory definition of a week’s pay has meant that many common elements of remuneration, such as overtime, commission and bonuses were historically excluded from statutory holiday pay.

However recent case law from the European Court of Justice has determined that workers are entitled to receive their “normal remuneration” in respect of annual leave under the EU Directive. This includes payment in respect of remuneration intrinsically linked to the performance of tasks they are contractually obliged to perform - meaning that, for example, certain commissions and bonuses must be included in the calculation of holiday pay such as commission determined by reference to sales achieved. The rationale is that workers would otherwise be placed at a financial disadvantage when taking annual leave, which may deter them from taking such leave. This would be contrary to the EU Directive’s purpose.

What remained unclear, however, until these recent decisions, was how this would be applied to the WTR.

Decision of the Employment Appeals Tribunal

 The EAT held as follows:

  • Under the EU Directive “normal remuneration” must be paid in respect of the 4-week entitlement to annual leave guaranteed by the Directive. Non-guaranteed overtime (where the employee is required to work overtime which is offered) must be included in the calculation of holiday pay, as must any other part of normal remuneration including shift allowances and similar payments. Taxable elements of payments for time spent travelling are also components of normal remuneration (and not expenses) and need to be included.
  • The WTR can and should be interpreted to include these payments in the calculation of holiday pay.
  • Backdated holiday pay may be claimed as an unlawful deduction from wages. The question of how far back a worker can claim backdated holiday pay turns on whether an underpayment forms part of a “series of deductions”. A claim must be brought within three months of the last deduction in any given series. If three months elapse between one period of underpaid leave and the next, this would be sufficient to break the series of deductions, and only the last deduction would be recoverable. This should mean in most cases that claims for backdated holiday pay will be limited to pay in the current holiday year.

Practical Implications

The potential financial implications from this decision for employers are significant. However the cases may be subject to further appeal, which means that a final decision could be years away.

In the meantime, employers must decide:

  • How to calculate holiday pay. Employers should consider what would constitute “normal remuneration” with regards to their workforce – i.e. which additional payments must be included in the calculation of holiday pay in light of the particular payments made to their workers. However given the likelihood of an appeal it may be premature to start changing holiday pay arrangements immediately.
  • How to structure future overtime arrangements. Options include offering overtime on a voluntary, non-regular basis or engaging temporary staff to cover increased workloads where this would be more cost effective than increasing holiday pay.