Should holiday pay reflect overtime payments? Yes, says the employment tribunal…

Background

The statutory rules concerning a worker's holiday rights are set out in the Working Time Regulations 1998 ("the Regulations"), which implement the EU Working Time Directive. Under the Directive, workers are entitled to four weeks of paid leave in each leave year. The Regulations, however, enhance that right by providing minimum holiday of 5.6 weeks, paid at a rate of a week's pay for a week's leave. This is calculated in accordance with the Employment Rights Act 1996, which is straightforward when the value of a week's pay does not fluctuate. When it does, however, the calculation becomes more difficult.

For example, where employees have fixed minimum working hours, but pay varies depending on the amount of work done, employers have to calculate average pay over the previous twelve weeks to determine the correct rate of holiday pay.

For some years, it has been an established principle that overtime need not be included in that average calculation, unless it is both guaranteed and compulsory. In most situations, overtime is not guaranteed, which means it doesn’t need to be included in the calculation of holiday pay. This follows the decision of the Court of Appeal in Bamsey -v- Albion Engineering and Manufacturing plc.

The Employment Tribunal's decision in the Neal case, however, challenges this established principle, and in so doing, further muddies an area of the law, which in many respects is already far from clear.

Neal -v- Freightliner Limited

Mr Neal was employed by Freightliner on a contract requiring a basic working week of 35 hours consisting of five seven-hour shifts. His contract required him to work varying shifts, including one in three Saturdays. Hours worked in excess of this (including additional Saturdays) would entitle him to overtime at a higher rate of pay.

In reality, Mr Neal never worked a seven hour shift. Instead, he regularly worked shifts which lasted between eight and a half and twelve hours. He received a higher rate of pay for each hour after the first seven hours of each shift, as this was classified as overtime.

Freightliner argued that Mr Neal's normal working hours were 35 hours per week, and anything over that was not guaranteed. When he took holiday, he was paid holiday pay based on his salary for those 35 hours only. Following the principle in Bamsey, the additional overtime he received for work in excess of his normal 35-hour week was not taken into account in calculating holiday pay.

Mr Neal argued that this was wrong as in practice, the extended hours were the hours he was required to work. He brought a claim for unauthorised deductions from wages and a breach of the Regulations. Mr Neal relied on the ruling by the European Court of Justice in Williams & Ors –v- British Airways Plc, which says that the EU Working Time Directive requires that holiday pay must correspond to a worker’s normal remuneration and should take into account payments which are ‘intrinsically linked’ to the performance of the tasks which the worker is required to carry out under his or her contract of employment.

Tribunal Decision

The Tribunal upheld Mr Neal's claim, concluding that the effect of the Williams decision was that the four weeks of holiday guaranteed by the Directive should include not only basic pay, but also an average of the overtime that he received for working shifts in excess of seven hours and on additional weekends over the preceding 12 weeks. This was the case even though the overtime and shift premiums were not guaranteed, and were effectively voluntary.

This decision is Tribunal level only, and so is not technically binding. However, it has been appealed to the EAT. If the decision is upheld at a higher level, this would mean that any employer who has paid employees overtime or shift premiums, but has not included any such payments made in the 12 weeks prior to the holiday in the calculation of holiday pay, could be exposed to claims for additional holiday pay. It is also possible that this decision could have an impact on those employers who pay commission and/or bonuses alongside basic pay.

Any paid overtime (whether voluntary or not) may now need to be considered alongside other premiums in holiday pay calculations. In effect, these calculations are moving towards being based on workers’ average earnings in the 12 weeks leading up to their holiday, and employers will need to ensure that they review overtime arrangements to ensure workers don't manipulate them so that they are working excessive amounts in the run up to planned holiday. Provided that employers are astute to potential abuse, this should be avoided. That said, this is likely to be easier said than done in smaller businesses.

The added complication is that this decision relates to the four weeks’ holiday pay that workers are entitled to under European law. It does not apply to the additional 1.6 weeks’ holiday that workers receive under UK law. An appeal would be welcome to clear up any confusion in the application of different rules for different weeks of a worker’s holiday.

Until we get clarification from the EAT, employers should seek legal advice when calculating holiday pay to avoid receiving a costly and time-intensive tribunal claim.