• Tar Tumber
  • 6 November 2014

What does the ruling regarding holiday pay and overtime mean for you?

‘Remember, remember, the 4th of November….’ – a slight change to the age old rhyme, but there were certainly some pre Bonfire night fireworks when the UK Employment Appeal Tribunal (EAT) ruled that workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments (limited only to the four weeks of holiday pay that is required by the European Working Time Directive).

So, what exactly does this mean to workers?

Well, under EU law, full-time workers should have four weeks paid time off a year, although companies can choose to give more than this. But the legislation does not define how holiday pay should be calculated. So, up until now, the UK Government’s interpretation of the EU Working Time Directive has been to pay employees ‘basic’ pay when on holiday – and this figure does not include overtime, commission-based payments or any other extras.

However, there have recently been some Tribunal rulings in Europe which have confirmed that employees are entitled to ‘normal remuneration’ when taking annual leave, which of course includes the elements of overtime, commission and other allowances.

The outcome of three EAT rulings in the UK on 4 November has now confirmed that this has to be the case in the UK. In each of the EAT cases (Bear Scotland v. Fulton and Baxter, Hertel (UK) Ltd v. Wood and others and Amec Group Ltd v. Law and others), the staff involved stated they had consistently worked overtime, but that was not included in their holiday pay, meaning they received considerably less pay when on holiday than when they were at work. 

The progress of these cases has been closely monitored by businesses, trade unions and the Government; with all involved anticipating claims of hundreds of millions of pounds in back pay for the past 16 years, to 1998 when the UK adopted the EU Working Time Directive. As a result, this has the potential to be crippling for employers!

What does this actually mean to employers though?

The Government estimates that one-sixth of the 30.8 million people currently in work get paid overtime – that’s around five million workers for whom their employers now need to include overtime and possibly commission payments as part of the calculation of holiday pay.

Overtime refers to ‘non-guaranteed’ and ‘compulsory’ overtime, where the employer does not have to offer overtime, but when it is offered, the employee does have to work it. Where this is not every day or week, but there is a settled pattern of working overtime, the Appeal Tribunal has ruled that employers must work out an ‘average’ overtime figure to include in the holiday calculation, but has not detailed what the reference period for working out the ‘average’ overtime figure would be. However, it is likely that the most appropriate reference period would be calculating the average overtime payment over a 12 week period, as is often used in other calculations of a ‘week’s pay’.

Furthermore, the Appeal Tribunal also found that the taxable elements of travelling time were also directly linked to the tasks that workers were required to carry out, so this element must also be included in the holiday pay calculation. The question around commission payments is yet to be decided, although this is likely to happen early 2015.

How about backdated payments?

This is the important part for employers and fortunately, the EAT substantially limited the possibility of backdated claims in two ways.

First, it ruled that if there was a gap of three months between holidays, then claims for underpaid leave preceding this gap would be inadmissible. In practice, this is likely to mean that employees can only claim for leave during the past year as there are likely to be breaks of more than three months between holiday periods taken over consecutive years. The impact on employers is therefore significantly less than previously assumed.

Secondly, the EAT confirmed that the inclusion of overtime and other payments as part of the holiday payment only applies to the 20 days (four weeks) holiday provided for under the European Directive; it does not apply to the additional eight days’ holiday provided for in the UK. This further limits the amount an employee can claim for in a backdated claim.

As it stands, unions have already filed a substantial number of claims for underpaid holiday pay, which had been halted pending the outcome of the three cases. At the time of writing, research further suggests that unions are now already asking workers who haven't received the same pay during their holidays as the rest of the year to contact them to lodge a claim.

Consequently, there is no doubt that employers may face claims for backdated holiday pay and these will mean financial outlay; however, this will be limited as detailed above. What the decision does say, is that going forward, workers will be paid a normal wage for periods of rest. So businesses need to be aware that they will face higher bills for holidays.

Likely impact on industry?

Research by EEF, the manufacturers’ organisation, suggests that most companies in its sector would have increased payroll costs. A survey of its members found 68% anticipated the change would add more than 3% to their wage bill.

As cited by the BBC, Head of Employment Policy at EEF, Tim Thomas, said:

"We won't see the full extent of damage until further down the line. There is a real danger that this ruling could ultimately hit jobs, pay and future investment."

Elsewhere, other employer groups have suggested that UK businesses could react by holding back pay rises, having an impact on talent retention. Organisations may also look at how they structure overtime and also look to minimise the increased liability for holiday pay by using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime.

So, despite limitations on the backdated element of holiday pay, the ongoing application of the revised holiday calculation could mean significant job losses as some businesses struggle to survive.

 What should employers do now?

Given the significant costs to business, my view is that the Government is likely to appeal to the Court of Appeal. Organisations could decide to wait for any appeal to be lodged by the Government and await the outcome, but this could take significant time and is not without risk as the requirement to include overtime as part of the holiday payment is now set as case law, and therefore, should be followed.

My advice would certainly be to assess your payroll and HR records to examine the possible exposure to claims (backdated and future) to assess your individual risk and circumstances. This should also consist of reviewing your current policies to align with the new requirements.

In addition, one immediate effect of the decision is that the four weeks' leave required by the Working Time Directive and the additional 1.6 weeks' leave provided by the Working Time Regulations are now payable at different rates, so this will also need to be carefully recorded and calculated.

Certainly, all employers need to ensure that complete and accurate holiday records are maintained going forward, and this needs to be communicated to all line managers where holidays are approved locally.

As a business, you may also wish to consider if other payments, such as commission, bonuses, standby payments etc. should be included at this stage – although the decision regarding commission payments is not expected until February 2015.

What next?

The Government has set up an emergency task force to assess the ruling. This includes representatives from employers’ groups including the EEF, CBI and FSB. Currently, there has been no formal decision on whether to appeal against the Appeal Tribunal’s ruling, although this will be the likely outcome. Watch this space for more updates as they come....