The Employment Appeal Tribunal (EAT) has ruled that ‘non-guaranteed’ overtime payments (i.e. where an employer is not contractually obliged to offer overtime, but a worker is contractually obliged to perform it if requested) should form part of the calculation of workers’ holiday pay. The much-anticipated decision in the consolidated appeals of Bear Scotland -v- Fulton and BaxterHertel (UK) Ltd -v- Wood and others, and Amec Group Ltd -v- Law will have a significant impact on the calculation of holiday pay moving forward.

On a more positive note for employers, the EAT’s findings in relation to retrospective claims for holiday pay will significantly limit potential ‘back pay’ liabilities.

Background

The European Working Time Directive (WTD) dictates that all workers are entitled to four weeks annual leave, but does not specify the rate at which this should be paid. The WTD is implemented in UK domestic law by the Working Time Regulations (WTR) which state that workers are entitled to 5.6 weeks’ annual leave (1.6 weeks more than required under the WTD) to be calculated at the rate of a week’s pay for a weeks’ leave. The calculation for a week’s pay is governed by the Employment Rights Act 1996 (ERA) and excludes some elements of remuneration such as overtime and commission.

A number of recent cases before the Court of Justice of the European Union (CJEU) sought to challenge the calculation of holiday pay on the basis that reference to normal salary alone potentially placed some workers at a financial disadvantage during periods of annual leave. The claimants argued that this deterred workers from taking such leave in the first place, contrary to the purpose of the Working Time Directive. The CJEU’s response in these cases was that workers on annual leave should receive their normal remuneration and, further, that normal remuneration entitled a worker to any payment which is ‘intrinsically linked’ to the performance of the tasks they are required to carry out under their contracts of employment. It was left to the domestic courts to determine what elements of remuneration would be deemed to be intrinsically linked to performance.

Although it has long been accepted that holiday pay should include a sum in respect of any guaranteed overtime, it was previously thought that discretionary overtime could be excluded from the calculation of holiday pay.

The cases before the EAT dealt specifically with whether particular types of remuneration, most notably non-guaranteed overtime and some travel payments, should be considered normal remuneration and included in the calculation of holiday pay.

As well as deciding how this would affect the calculation of holiday pay moving forward, the EAT were tasked with reviewing what, if any, retrospective effect a change to the calculation would have.

Judgment

The key points from the judgment are that:

  • Workers’ holiday pay should include a sum of money to reflect normal non-guaranteed overtime, but this only applies in respect of the basic 4 weeks’ leave granted under the WTD (i.e. the additional 1.6 weeks under the WTR can be calculated without reference to overtime).
  • Claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments (subject to the reasonable practicability test).
  • Travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

Comment

Practically, what does the decision mean for employers moving forward?

Following the cases before the CJEU, it was widely anticipated that employers would be required to include non-guaranteed overtime in the calculation of holiday pay moving forward. Early reaction has therefore centred on the element of the judgment that deals with retrospective claims. The requirement to have no more than three months between each unauthorised deduction will significantly reduce potential back pay liability for employers. This is assisted by the fact that the EAT indicated that the further 1.6 weeks’ leave provided by the WTR will be the last leave to be taken in any holiday year. As such, this means that claims for back pay will stop when there is more than three months between the four weeks’ leave under the WTD and any subsequent WTD leave taken in the following holiday year. Therefore, claims for back pay are likely to be limited to the current holiday year.

Notwithstanding the above, we understand that a number of claims have already been filed and stayed by the tribunal pending the outcome of these appeals. Although employers will be required to deal with these claims, we hope that the limited potential to claim back pay may lead to settlement at an early stage and more realistic expectations for claimants.

Perhaps the most complicated element of the above is that non-guaranteed overtime payments need only be taken into account in respect of four of the workers 5.6 weeks’ of annual leave. While this may reduce employers’ past liability, the financial saving associated with retaining this distinction will have to be weighed against the administrative upheaval of applying two different rates.

Much uncertainty still surrounds this decision and the day to day implications that it will have for UK employers. Leave has been granted to appeal which indicates that the matter is far from settled. Further, the EAT did not provide a definitive list of what should be included in a calculation of normal remuneration or the reference period that should be applied.

Outside of the court setting, Business Secretary Vince Cable has announced that he is setting up a new taskforce to assess the impact of the ruling. We will await the outcome of this review with interest.

For the time being, it is likely that many employers will be forced to review their practices to cope with the additional cost associated with the revised holiday calculation. Some have already indicated that it is likely to have an impact on future pay rises and may even lead to a reduction in the workforce. Other employers may wish to consider what steps they can take to minimise liability for holiday pay in the first place. Suggestions include moving away from overtime payments to a salary remuneration structure or the use of seasonal or agency workers for busy periods rather than offering overtime to permanent members of staff.