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EAT holiday pay and overtime ruling: impact on employers

30 January 2015

In November 2014, the Employment Appeal Tribunal (EAT) confirmed that overtime payments should be included when calculating holiday pay. Gemma Steele and James Tait in the employment team at national law firm Browne Jacobson LLP discusses its implications.

In the joined cases of Bear Scotland Ltd and ors v Fulton and ors; Hertel (UK) Ltd v Woods and ors; Amec Group Ltd v Law and ors, the EAT confirmed that all elements of a workers normal remuneration, including payments for non-guaranteed overtime, must be taken into account when calculating holiday pay under the EU Working Time Directive.

Previously, under UK law, holiday pay was calculated by reference to a workers basic salary only. However, in this recent case, the EAT determined that holiday pay should be based on a workers normal remuneration, which would include both "guaranteed" and "non-guaranteed" overtime (the difference between the two being that guaranteed overtime means the employer must, by contract, offer the work as overtime and so will be liable to pay for the work even if it has none available to offer at the time).

The question as to whether the same position applies to voluntary overtime has yet to be determined (voluntary overtime being the case where work which the employer asks the employee to do, but which the employee has no contractual obligation to perform - unless he agrees to do so). The EAT also found that the travel time payments which were paid, and which exceed expenses incurred, should also be reflected when calculating holiday pay because the time spent is linked to work - it is not an expense ancillary to travel such as a train ticket or bus fare.

But the judgment was not all bad news. It was previously thought that workers would be able to bring claims for backdated holiday pay right the way back to when the working time regulations were introduced in 1998. However, the EAT confirmed that if there is a gap of more than three months between any period of underpayment, any such claim would be out of time (subject to the stringent rules on extending time). Whilst this will significantly restrict the scope for workers to claims arrears of holiday pay, many consider that this finding is the most likely to be overturned on appeal.

Given the potential ramifications for employers, permission to appeal has been granted. Vince Cable has also announced that he has set up a task force to discuss how the impact on business can be limited. Given that the taskforce is made up of seven employer organisations, but no unions, law centres or employee organisations, it seems likely that their recommendations will be employer-friendly!

So what does all this mean for UK employers?

  • If you regularly pay non-guaranteed overtime to your staff, you could be at risk of claims for unlawful deduction of wages if this overtime was not taken into account when calculating holiday pay.
  • If, however, overtime is sporadic, for example only at Christmas time, it is likely that these claims would now be out of time.
  • Claims from ex-members of staff who left over three months ago are also likely to be out of time.
  • It is important to note that this decision applies to all workers, not just employees. Therefore payments may be due to agency workers, apprentices, casual workers, consultants, fixed term workers, apprentices and possibly even volunteers.
  • Employers can expect an influx of claims on the back of this decision. However, given that permission to appeal has been granted, the tribunals may well decide to stay all of the cases whilst they await the decision of the Court of Appeal.
  • Going forward, non-guaranteed overtime should be included when calculating holiday payments. Travel time payments, which exceed expenses incurred, should also be reflected when calculating holiday pay.
  • There could also be implications for purchasers of a business who offers overtime. Under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006), liability for claims relating to back pay could transfer to the purchaser.

What options do UK businesses have now?

  • Do not do anything - wait to see if the decision is overturned and continue as before. This is a potentially risky strategy (pending clarification by the Court of Appeal) and could lead to a number of historic and future claims.
  • Revise policies now to include non-guaranteed overtime in holiday pay calculations. Consider also including voluntary overtime on the basis that this is currently subject to clarification by the Tribunals
  • You will need to consult with trade unions if the workforce is unionised. After three months of implementation, staff will be out of time to bring historic claims for underpayments.
  • Consider settling potential claims with staff. To do this you will need to:
  1. Review your overtime history to identify those staff that have been paid guaranteed and non-guaranteed overtime.
  2. Identify those who have not taken/been paid any holiday in the last three months as these staff are likely to be out of time for bringing a claim based on the EATs decision. However, as mentioned above, this finding is subject to being overturned on appeal.
  3. For those who have worked non-guaranteed overtime and taken/been paid holiday in the last three months, identify if there have been gaps of three months or more where no holiday has been paid. Potential claims will date back to this date only.
  4. Once you have worked out the affected staff and the time period for each, calculate how much holiday pay is owed.
  5. Potential claims could be settled in full or you could attempt to negotiate a reduced amount with affected staff (possibly through ACAS).
  6. Settlement should be recorded either in a COT3 (with the assistance of ACAS) or in a settlement agreement to ensure that all historic claims are settled.
  • Wait to see if any staff bring claims and consider settlement at this point. It should be noted that workers are now required to pay a fee of £160 to issue their claim and £230 hearing fee. Whilst this may deter some workers from bringing a claim (particularly if the payment they are claiming is not likely to surpass the fee), those who do enter a claim are likely to want the employer to reimburse these fees as part of any settlement deal. A tribunal is also likely to award reimbursement if the case proceeds to a hearing and the claimant succeeds in their claim.
  • Impose a ban on holiday for three months in order to ensure that historic claims would be out of time. This would not negate the requirement to ensure that overtime is included in calculating holiday pay after this date and may lead to unmanageable levels of holiday later in the year. More importantly it is likely to lead to huge staff unrest if an employer is banning holiday at Christmas!
  • Consider, where relevant and possible, amending policies and contracts of employment to clarify that overtime is voluntary and will not be included in the calculation of holiday pay.

This article was first published in The Structural Engineer

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