Employment e-Brief: Overtime should be included when calculating a worker’s holiday pay

The Employment Appeal Tribunal (EAT) has today held that overtime (even if voluntary) should be included when calculating a worker’s holiday pay.  Over five million workers, a sixth of the UK workforce, currently do overtime and so may be affected by the decision.

Background:

• Article 7 of the Working Time Directive provides that workers have the right to at least 4 weeks’ paid holiday each year.  The Directive does not specify how holiday pay should be calculated.
• The Directive is implemented into UK law by the Working Time Regulations 1998. Regulation 13A also goes further than the Directive by providing employees with an additional 1.6 weeks annual leave (5.6 weeks in total).
• The Regulations do specify how holiday pay should be calculated by suggesting that some workers who earn a basic salary plus commission are only entitled to holiday pay based on their basic salary.  Historically, the UK Courts accepted this principle and additional payments such as overtime and commission have been legitimately excluded.
• In 2011, the European Court of Justice held in Williams and others v British Airways Plc that the Directive requires that workers receive their ‘normal remuneration’ while on holiday and therefore any payments intrinsically linked to the performance of a worker’s tasks form part of that normal remuneration. This Judgment changed the approach of the UK courts.
• Earlier this year the European Court of Justice held in Lock v British Gas Trading Ltd that holiday pay must be calculated to take into account commission.  So if an employee usually earns commission, they should not be disadvantaged by taking their annual leave.

Today’s ruling:

The EAT has today ruled in Bear Scotland v Fulton (and joined cases), that:

• holiday pay should also reflect normal overtime (even if not guaranteed);
• this only applies to the basic 4 weeks’ leave granted under the Working Time Directive, and not the additional 1.6 weeks under Regulation 13A of the Working Time Regulations;
• claims for arrears of holiday pay must be brought within 3 months from when the payment was due (and will be out of time if there has been a break of more than three months between successive underpayments); and
• travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

The EAT refused to grant a reference to the Court of Justice of the European Union, but gave permission for an appeal to the Court of Appeal. The decision is highly likely to be appealed.

Business Secretary Vince Cable has announced he is setting up a new taskforce to assess the impact of the ruling given the impact on employers nationally.

To discuss this e-Brief in more detail, please contact a member of the Employment team.