The recent decision on overtime and holiday pay: what does it mean for employers?
The Employment Appeal Tribunal decision in Bear Scotland Ltd –v- Fulton (and others); Hertel (UK) Ltd –v- Wood (and others) and Amec Group Limited –v- Law (and others)
The Employment Appeal Tribunal (EAT) has finally handed down its decision regarding whether overtime payments can be included for the purposes of calculating holiday pay. The EAT held that where workers are required to work overtime (but the employer was not obliged to offer it), overtime pay should form part of the worker’s normal remuneration and therefore be included in the calculation of holiday pay. The EAT’s decision did not specify whether voluntary overtime would be treated in the same way. It is important to note that the decision only relates to the first 4 weeks of a worker’s holiday (their right under the Working Time Directive) and not to the additional 1.6 weeks (their domestic right under the Working Time Regulations).
What happens next?
The EAT granted leave to appeal in the cases of Hertel (UK) Ltd –v- Wood (and others) and Amec Group Limited –v- Law (and others). It was assumed therefore that an appeal would be lodged but Unite, who represented the claimants in these cases, have confirmed that they do not intend to appeal. It is however unlikely that this case marks the end of the matter. One of the outstanding issues from the Bear case is whether purely voluntary overtime is to be treated in the same way and what the relevant reference period is for calculating holiday pay. The Leicester employment tribunal is due to consider the European Court of Justice’s decision in Lock v British Gas Trading in February 2015, which should give some clarity on the relevant reference period for calculating holiday pay. Vince Cable, the Business Secretary, has also confirmed that the government has launched a taskforce to ‘review the judgment in detail as a matter of urgency’.
Impact on the UK workforce
With over 30.8 million people in work in the UK and over 5 million undertaking voluntary or compulsory overtime there were fears this decision would have a huge impact on UK employers. The EAT decision does however state that claims for underpaid holiday can only be backdated for a limited period. Workers cannot therefore make a claim more than three months after the last incorrect payment. In some circumstances however, workers may be able to bring a breach of contract claim for unpaid holiday pay for a period of six years in the County Court.
Due to the cost involved in including overtime within holiday pay calculations, many employers will be looking to reduce the overtime they offer to staff. Helpfully this may mean that employers take on more staff, although it remains to be seen whether more staff will be employed on zero hour contracts if businesses require greater flexibility to undertake overtime.
A recent survey of the Federation of Small Businesses (FSB) members found that a third of small businesses with employees paid staff voluntary overtime. The FSB survey said that up to 400,000 firms could be affected.
Practical examples and guidance
Example 1: Today’s date is 6 November 2014.
You run a small business with 22 workers, of which 13 regularly work overtime. Your holiday year runs between 1 January to 31 December.
Two of these 13 workers, Matt and Jenny, approach you separately, having recently heard about the changes in the law on the news, telling you that they would like to make a claim for ‘lost’ overtime payments when they had taken holiday.
You check your records for both workers and note the following details:
Matt is contracted to work 28 hours a week but is regularly offered to work an additional 7 hours each week, an opportunity which he is obliged to accept and always does.
Matt recently took 4 days’ holiday between 20 – 23 October 2014 (inclusive), 3 days’ holiday between 20 – 22 August (inclusive) 2014 and 4 days’ holiday between 1 – 4 April 2014.
Jenny is contracted to work 21 hours a week but during busy times, such as summer time, is offered to work varying overtime hours on an ad-hoc basis, which Jenny sometimes accepts depending on her availability on the dates offered.
Jenny took 2 days’ holiday between 8-9 September 2014 (inclusive) and 3 days’ holiday between 25-27 June 2014 (inclusive).
How do you deal with Matt and Jenny’s requests?
Points to Note for Matt:
Matt is offered non-guaranteed overtime – where carrying out overtime hours is not a requirement of his contract but is offered it on a regular weekly basis and he regularly accepts it.
The EAT held that non-guaranteed overtime is to be included in holiday pay. According to the EAT’s decision, Matt can make a backdated claim for the 4 days in October and the 3 days in August, but not for the 4 days taken in April. This is because a worker cannot make a backdated claim where a period of more than 3 months has elapsed between incorrect holiday payments. In this scenario, a gap of 4 months has passed between April and August, therefore Matt cannot claim for the 3 days’ holiday taken in April.
Points to Note for Jenny:
Jenny is offered overtime on a voluntary basis. There is a distinct lack of consistency in terms of when the overtime is offered, and in addition, Jenny does not carry out overtime work on a regular basis.
Overtime which a worker is not permitted to refuse (i.e. guaranteed and non-guaranteed overtime) must count as part of their “normal” pay when calculating the pay they should receive on holiday. The EAT did not specify whether voluntary overtime would be treated in the same way as guaranteed and non-guaranteed overtime, therefore Jenny is unlikely to be able to claim for any of her past holiday dates.
Example 2: You receive a letter from your employee Bob on 6 November 2014. Bob is complaining that he has been underpaid holiday pay on the basis that his overtime payments should be included within the calculation. Bob took 21 days holiday of his holiday allowance by the end of July 2014 and has since taken his remaining 7 days in August/September/October. How should you respond to Bob?
It was flagged in the EAT’s decision that the inclusion of overtime in the holiday pay calculation only applies to the 4 weeks’ leave derived from the Working Time Directive. It indicated that in any holiday year workers will normally be deemed to take their Directive holiday entitlement first and the additional 1.6 weeks’ Working Time Regulation 1998 leave last. This means that the 7 days’ overtime which Bob is asking to be included is not covered by this ruling and there would be no underpayment in respect of overtime.
What should you be doing now?
We suggest that you carry out a pay audit to evaluate the potential liability for your business.
When looking at overtime payments, in order to ascertain whether the payment is intrinsically linked to pay, you should consider:
- whether it is contractual or voluntary;
- whether it is guaranteed;
- whether it is compulsory;
- whether the worker has a regular pattern of overtime and
- whether the level of payment for overtime is regular and standard.
If you require any assistance or further information on this matter please contact a member of the Employment Team.