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"Non-guaranteed" overtime must be included in the calculation of holiday pay

07 November 2014 #Employment


The Employment Appeal has given its judgment in the case of three appeals – Bear Scotland Ltd and others v Fulton and others [2014], and Hertel (UK) Ltd v Woods and others [2014] and Amec Group Ltd v Law and others [2014]. The common issue in each of these cases was the calculation of holiday pay.

The cases centered round the interpretation of Article 7 of the Working Time Directive. This Article reads as follows:

“Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions of entitlement to, and granting of such leave laid down by national legislation and/or practice.

The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.”

The question being addressed in these appeals is what ‘paid annual leave’ means in this context.

In the Bear Scotland case two employees alleged that their employer had made unlawful deductions from their wages by not including overtime payments and other payments associated with their work when calculating the amount that they should be paid in holiday pay. In the other two cases the allegation was that the employees had suffered an unlawful deduction of wages because overtime payments had not been included when calculating their holiday pay.

The Employment Appeal Tribunal has ruled in favour of the employees, ruling that workers are entitled to be paid a sum of money which reflects “non-guaranteed” overtime payments when their annual leave payments are calculated. Non- guaranteed means overtime that the employee is contractually required to undertake. It is already well established that guaranteed overtime ie overtime that the employer must make available to the employee, has to be included in the calculation of holiday pay.

The position as regards voluntary overtime ie overtime that the employee is free to turn down if they want to, appears to be left uncertain by the judgment, not being relevant to the cases in issue.

  • How does this ruling suggest that holiday pay should be calculated?

In the judgment the EAT refer to the concept of ‘normal pay’ which suggests that the worker should be receiving the same rate of pay during a period of annual leave that they would normally receive when working. It goes on to note that, where there is no ‘normal pay’ then an average pay over a reference period determined by the Member State of the EU should be used to calculate annual leave payments. In the UK this reference period is the 12 weeks prior to the leave being taken.

  • Do the appeals only relate to overtime payments?

No, not entirely. In the Hertel and Amec cases there were issues raised in relation to the payment of additional allowances. Specifically, these were a ‘Radius Allowance’ which was paid to any employee who had to travel to a site more than 8 miles away. This allowance was for travelling time and fares. The HMRC treated this partly as travelling costs and partly as taxable remuneration – the claim here only relates to the taxable remuneration element. The other allowance was a Travelling Time Payment which remunerated employees for travelling time when long distances were involved.

The EAT found that these two allowances were specifically related to the work that the employee was doing, and hence formed part of remuneration. It was concluded, therefore, that they should also be taken into account when determining the amount to be paid during annual leave. 

  • How far back can claims be made?

If a worker alleges that s/he has not been paid at the correct rate when taking annual leave this would be a claim of unlawful deductions from wages and the claim should be brought to the employment tribunal within three months of the deduction occurring. However, if there has been a series of unlawful deductions a claim can be made for that series of deductions as long as there has not been a break of more than three months in that series. The EAT ruled that the normal definition of ‘series’ applies and that for there to be a series there must be a factual link and a link in time between the deductions.

Specifically, this means that:

-          If a worker has consistently had overtime excluded from the calculation of annual leave, and there is a gap of less than three months between each of these occasions of annual leave the claim for unlawful deductions of wages can go back over a lengthy period of time.

-          If a worker has had a gap of more than three months between the periods of annual leave (and hence between the unlawful deductions) it will not be possible to bring a claim for the deductions prior to that three month break, unless the worker is able to demonstrate to the employment tribunal that it was not reasonably practical to bring the claims in time.

-          If a worker has not taken any leave in a three month period, and has not brought a claim within three months of the last deduction then the series of deductions would be broken and a claim could not go back any further.

  • What are the practical implications for employers?

For employers who pay overtime, the implications are potentially huge. The EAT judge has given permission for the rulings to be appealed to the Court of Appeal, noting, however, the judge’s view that any appeal against the ruling relating to overtime payments being included in holiday entitlement is unlikely to succeed. He went on to say that the issue over back pay and the three month period is an arguable matter for appeal. Hence employers need to remain very wary of this part of the decision being reversed on appeal and continue to make financial provision for claims going back throughout an employee’s employment and as far back as 1998.  

Employers who pay overtime should check how the judgment affects them, including the extent of historic liabilities. In future, non-guaranteed overtime payments should be included in the calculation of holiday pay, unless employers are prepared to take their chances of an appeal succeeding. Employers should also review and take advice as to whether other payments which are specifically related to remuneration, are also being included when calculating the amount that an employee is entitled to when taking annual leave.

The position on voluntary overtime remains open. There is a good chance that the courts will, in future, confirm that this should also be included in the calculation of holiday pay. Financial provision should be made.  The Freightliner case to the EAT, which dealt with voluntary overtime, settled before hearing, so there was no determination by the judge.

It should be noted that this only includes 4 weeks of annual leave, because the ruling is only looking at the interpretation of the Working Time Directive. The Working Time Regulations 1998 do give an additional 1.6 weeks of annual leave entitlement, but that additional 1.6 weeks is not covered by this ruling.

Note that the government has announced that it will be setting up a taskforce to review the impact of this ruling.

Kathy Daniels
Forbury People Consultant

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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