Overtime to be used in holiday pay calculations

Following the landmark case which ruled that overtime could be included in Holiday Pay, we wanted to give you a quick overview – as it may affect the way you approach your annual leave.

Historically, non-guaranteed overtime has not been used in the calculation for holiday pay at the time that employees take leave. This has long been criticised by Unions on the basis that, as they see it, it penalised workers for taking the time off that they are entitled to.

Indeed there is some merit to this stance when you consider that the right to paid leave arises under the Working Time Regulations 1998, which is in essence a health and safety provision. If an employee is regularly paid less for time off work than they are when they are at work, it is not difficult to understand the view that it creates a disincentive to take the time off work work that the law requires is taken.

Well, the situation was recently addressed by the Employment Appeal Tribunal in the case of Bear Scotland v Fulton (which also encompassed the cases brought against Hertel (UK) Ltd and Amec Group Ltd). It was held that the Working Time Regulations could and should be interpreted as to mean overtime ought to be included in the basis for a calculation of holiday pay when an employee or worker takes leave.

The main points of the landmark judgment are:

1.  holiday pay should be calculated so as to include a sum to reflect normal non-guaranteed overtime;

2.  This only applies to the basic 4 weeks’ leave originally introduced by the Working Time Regulations 1998 (as amended), and not the additional 1.6 weeks subsequently brought in under Regulation 13A of the same regulations;

3.  Claims for historical underpayments based in the previously accepted calculation method will not have been brought within the relevant time limit (subject to the reasonably practicable test) if there has been a break of more than three months between successive underpayments;

4.  Travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

Of the estimated 30,000,000 workers in the UK, approximately 5,000,000 regularly receive overtime payments. This decision therefore has the potential for widespread impact, most notably across the manufacturing industry where it is believed that over 90% of employers would suffer financially as a result of the decision.

Within hours of the decision being released, the Government has announced it is setting up a taskforce with the remit of specifically “limiting the impact of the holiday pay ruling”. So, some potential encouragement there for employers, particularly given that the taskforce is rumoured to be made up of seven employer’s organisations and no unions, law centres or employee organisations. No prizes for guessing what the recommendations of that taskforce are likely to be.

In the run up to the decision, there were significant fears that the decision could create a groundswell of claims for backdated holiday pay, possibly back to the introduction of the Working Time Regulations in 1998, at a potential cost of billions of pounds.

The Employment Appeal Tribunal (EAT) decision seems to go someway to appeasing those fears in that any period of three months or more during which there was no incorrectly calculated holiday pay would break the chain – i.e. the employee would not be able to go back further than the end of that three month period.

However, it is highly likely that a vast number of employees have not gone three months without a day’s leave, and in addition the EAT has given leave for the representatives of the employees to Appeal this particular aspect of the decision to the Court of Appeal.

Initial reaction seems to suggest that where feasible, employers may seek to reduce the availability of overtime in response to the decision, to keep the costs down. Quite if and how they will do this remains to be seen.

The judgment also left some matters unclear, for example whether purely voluntary overtime ought to be included in the basis for calculation.

In what is a seemingly dark day for employers who regularly have overtime bills, it is clear that the Government at least is trying to ride to the rescue. Whether or not this will come, or if so whether it will be by way of legislative change or further legal appeals remains to be seen.

For now at least, it seems that the cost of doing business has once again risen, and it remains to be seen whether the potential stifling of investment and growth that this could cause will be as bad as initial fears suggest.

The Union ‘Unite’ have stated that they are not going to appeal the decision to limit backpay claims, but it is highly likely that somebody will. Watch this space …