Non-guaranteed overtime should count towards holiday pay calculation

Posted by Max Craft, 4th November 2014
Businesses may have to set aside large sums of money to cater for underpaid holiday pay according to a ruling by the Employment Appeal Tribunal (EAT) in the combined cases of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others and Amec Group Limited v Law and others.

This is because, although guaranteed overtime has always had to be included in the calculation of holiday pay, this ruling has confirmed that non-guaranteed overtime must also be included when it is undertaken regularly. ‘Non-guaranteed overtime’ is overtime which workers are required to work but which employers are not obliged to offer. There is a potential area of uncertainty concerning the status of non-regular voluntary overtime (which the worker does not have to work), which was not specifically dealt with in this case.

The EAT ruling is a significant and worrying outcome for businesses in the UK, where the Government estimates that one sixth of the 30.8 million people in work get paid overtime. For this reason the EAT Judge has given all the parties permission to appeal to the Court of Appeal on all points on which they lost.

Not only that, Business Secretary Vince Cable announced shortly after the judgment was published that the Government is setting up a task force to assess the impact of the decision and is reviewing the EAT decision “as a matter of urgency” to properly understand the financial exposure employers face. The task force will consist of a selection of government departments and business representative groups including the CBI, Institute of Directors, British Chambers of Commerce and British Retail Consortium. The purpose and extent of its remit is currently unknown. The determining factor will be the Court of Appeal’s determination of the requirements of European law.

The concerns for business do not end there, because, in addition to overtime pay, other cases have established that payments such as commission should be included in the calculation of holiday pay. In the case of Lock v British Gas Trading Ltd it was left it to national courts to decide what reference period should be looked at when calculating the commission to be included in holiday pay. Mr Lock’s case will be considered by the Employment Tribunal in Leicester in February 2015.

These cases stem from the 2012 Supreme Court ruling (after consideration by the European Court of Justice) that British Airways pilots should be paid not just their basic salary as holiday pay, but also additional payments they would have received whilst working, as long as they were “intrinsically linked to the performance of the tasks” which the pilots were required to carry out.

Following this line of argument, last year an Employment Tribunal ruled that regularly worked overtime should also be included in the calculation of the pay workers are entitled to when they take annual leave (Neal v Freightliner). That decision goes against the 2004 ruling by the Court of Appeal in Bamsey v Albon Engineering and Manufacturing Plc that only overtime which is guaranteed by the employer is included in the calculation. The Freightliner case was subsequently settled which is why this latest ruling by the EAT is so important. The underlying issue is that the Working Time Regulations do not correctly implement the Working Time Directive.

The EAT’s decision is restricted to the minimum four weeks’ leave required under the Working Time Directive, and not the 8 days ‘additional annual leave’ introduced by the UK later. This means that holiday pay which takes overtime into account can be limited to those four weeks – if businesses are willing to tackle the administrative difficulty of differentiating between the two types of leave.

Importantly for employers, with this judgement that non-guaranteed overtime should be included in holiday pay calculations, a critical issue also dealt with by the EAT was how far back claims by underpaid workers could go.

Arguments were raised before the EAT that if a worker is successful in establishing that there has been underpayment of holiday pay for this reason over a number of previous years, the claims could go back as far as 1998, when the Working Time Regulations were introduced. However, one significant aspect of the EAT decision which could substantially reduce exposure to backdated claims is the EAT’s view that, if the series of underpayments has been punctuated by a gap of more than 3 months, such a claim cannot be brought because of the three month time limit under current legislation. This means a break of more than 3 months between one period of a worker’s holiday and the next might be enough to break a series of underpayments – leaving retrospective claims possible only for a limited period.

What should employers do now?

The position on overtime is now relatively clear, although we have no doubt that these cases will continue to the Court of Appeal. For the moment, employers who have not included non-guaranteed overtime pay in their calculation of holiday pay to date will want to adopt a strategy to limit their liability for future claims as well as minimise the threat of backdated claims. This will include:

  • A risk assessment, to identify what type of overtime is worked in the organisation and whether workers are contractually required to work it. Employers will need to assess the number of workers affected and the amount of overtime worked. It will also be necessary to establish when those workers last took holiday. This will give employers a better understanding of the risk they might face and help them decide on what payments to make the next occasion holiday is taken;
  • Deciding whether to implement a policy of including overtime in holiday pay calculations to avoid future claims. Adopting this policy quickly, particularly where workers are contractually required to work overtime if asked, could also assist in establishing a gap of three months for workers who do not bring backdated claims straight away;
  • Deciding whether to make a distinction between the four weeks’ minimum leave under the Directive to which this decision applies, and the additional 8 days leave (and any contractual leave over and above that) for which overtime potentially does not have to be included.

Employers need to be aware that workers will now be getting advice to present Employment Tribunal claims, with the resulting disruption and cost that that brings, and potentially with the outcome deferred until the issues have completed their legal journey through the appeal courts. However, the need to pay a fee for each such claim will present potentially difficult choices for workers pursuing such a course of action.

Alternatively, it is clear that this is a key topic for the Government, with its swift announcement about the task force and further guidance may be provided fairly soon. Please do not hesitate to contact us if you require advice on the appropriate strategies to manage your exposure to holiday pay/overtime claims.

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