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Do you include overtime when calculating holiday pay? Recent case says yes.

20 September 2013 #Employment


The established legal position is that for  employees with no normal working hours, when calculating statutory holiday pay, employers do not have to include compulsory overtime when calculating holiday pay (under the Working Time Regulations). However, any overtime that is guaranteed to the employee under their contract of employment must be included in the calculation. Of course, it is open to the employer to be more generous under the contract of employment and include compulsory or even voluntary overtime as well. Here, we are only concerned with the statutory minimum.

Compulsory overtime means work that the employer can require the employee to do in addition to normal working hours, from time to time. It may be that in practice the employee is rarely required to do the extra hours, the overtime being at the discretion of the employer. Guaranteed overtime is different in that the employee is contractually entitled to a certain level of overtime.

The position is different again for employees who have no normal working hours per week. In their case, any overtime would be included (including voluntary overtime) as holiday pay for such employees is calculated as an average of all sums earned in the previous 12 working weeks.

However, in a recent employment case, Neal v Freightliner Ltd, the judge found that Mr Neal’s holiday pay should be calculated so as to include both shift premiums and overtime payments. Mr Neal worked a basic 35 hour week.  It was  contended that the present legal position could no longer be sustained in light of the European Court of Justice’s decision last year  in British Airways plc v Williams and ors.  In that case, not dealing explicitly with overtime, the ECJ considered 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. When that case returned to the Supreme Court last year (British Airways plc v Williams and ors 2012 ICR 1375) the Court held that pilots’ holiday pay should be calculated by assessing average payments made over a representative reference period, to include their flying pay supplements.

The employment judge in the Neal case went on to find that Mr Neal’s shift premiums and overtime were “intrinsically linked” to the performance of the tasks he was required to carry out under his contract and hence were part of the holiday pay calculation. Mr Neal’s claim was for a series of unauthorised deductions.

The case gives rise to significant concern in that it seriously questions the lawfulness of how UK employers currently calculate holiday pay. It could be a real time bomb.  If the employment judge in the Neal case is right, it could be that employers have large historic liabilities for holiday pay,  calculated without reference to overtime. Such claims can go back some time (ie more than three months) on the basis of there having been a series of deductions.

The Neal case, is however, only first instance and, we understand, is going to appeal. Hence, we do not recommend employers completely revise how holiday pay is calculated, not until the case is resolved at appeal, which may take some time. However, in the meantime, it would be prudent for employers paying overtime to make some contingency for holiday pay claims across their workforce.

If you would like some further guidance on how to calculate possible liabilities, please let us know. We will keep you informed of progress in the Neal case.

Clarkslegal, specialist Employment lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at employmentunit@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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