Holiday Pay for Workers – Overtime to be included in Holiday Pay calculations

The Employment Appeal Tribunal (EAT) has today reached a landmark decision in the cases of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others.

The EAT ruled that non-guaranteed overtime (where an employee has no right to the overtime, but the employer has a right to impose it) should be included in employers’ calculations of holiday pay.

The Traditional Position

All employees are entitled to holiday pay. A week’s pay is calculated by either the normal rate of pay, if the employee’s hours or pay for amount of work done does not vary; or the average remuneration over the previous 12 weeks if the employees’ hours or remuneration varies.

Traditionally, in relation to the first category, this has been interpreted by the UK courts to exclude overtime. Prior to the decision reached today, only overtime that was both compulsory and guaranteed was required to be taken into account when calculating holiday pay.

The decision and its Consequences

The decision is seen as a huge victory for workers as it means that all people working overtime required by the employer – even if not guaranteed – can now claim for additional holiday pay. Contrary to what is reported in the media the position on genuinely voluntary overtime has not yet been addressed. We can expect a test case soon!

Prior to the decision being released there were concerns that employees would be able to claim arrears of holiday pay over many years. Previous case law has held that arrears of salary can be claimed by way of a claim for unlawful deductions from wages. The time limit to bring such claims is 3 months from the last deduction or series of deductions.  The EAT has held that where claims for arrears of holiday pay are pursued in this way, then if the series of ‘deductions’ is broken by a gap of 3 months, the series is broken meaning employment tribunals have no jurisdiction over such claims and they are ‘time barred’.  This limits the scope for employees to claim arrears of holiday pay over many years.

The case does not provide guidance as to the period over which an employee’s earnings and overtime should be assessed to calculate holiday pay.

It is likely that the ruling will be appealed to the Court of Appeal, by the employers and also the employees’ trade unions, meaning a final decision may be years away.

It is estimated that one-sixth of the 30.8 million people in work get paid overtime. This means around five million workers could be entitled to more holiday pay and the ruling will have widespread implications for all companies with employers no doubt looking to re-evaluate how they allocate overtime and whether there is a more cost-effective way of dealing with requirements for extra work.

Prudent employers will review their overtime policies and procedures immediately. The expert team at HardingEvans are available to advise on what this means for your business. Contact Daniel Wilde for more information on 01633 244233 or email at wilded@hevans.com