Holiday Pay

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The long-awaited holiday pay decision has now been delivered and has been widely publicised. With many employers worried about the implications we set out the facts below:

What was the case about? The Employment Appeal Tribunal (EAT) heard three conjoined cases (Bear Scotland v Fulton & Others; Hertel (UK) Ltd v Woods & Others and; Amec Group Ltd v Law & Others), all of which concerned the question of whether or not holiday pay should include overtime. The employers in these cases sought to appeal against a finding that they had made unlawful deductions from the claimants’ wages when they failed to include overtime in their holiday pay. The employees who worked for Bear Scotland were required to work any overtime offered to them but Bear Scotland was not required to offer any overtime.

What does the law say? Holiday entitlement and holiday pay are seen as two aspects of a fundamental right in EU law: the right to a holiday. In European law the Working Time Directive gives employees the right to 4 weeks’ paid annual leave. The Working Time Directive was implemented in the UK by the Working Time Regulations 1998 (WTR) which gives employees the right to 5.6 weeks holiday i.e. 28 days for a full-time employee. The WTR provides that workers should receive a week’s pay for each week of holiday. It goes on to state that a week’s pay is defined by the Employment Rights Act (ERA) – and this is where the problem occurs. The ERA states that for those with no normal working hours a week’s pay is calculated by averaging their weekly remuneration. However, for workers that are entitled to overtime pay when they work more than a fixed number of hours, their ‘normal hours’ are regarded as the fixed hours and not the overtime, even if it is compulsory to work it. Previous European cases had found that a week’s pay should include normal remuneration which includes anything intrinsic to work. The question before the EAT was therefore whether the WTR was still compatible with the Working Time Directive.

What was the outcome? The EAT found that normal pay includes pay that is normally earned and therefore includes overtime. However it did state that ‘payment has to be made for a sufficient period of time to justify’ it being called normal. It appears that sporadic overtime is therefore excluded from the definition of normal pay. The EAT’s decision only applies to the 4 weeks of holiday provided by European law so overtime does not necessarily have to be included in the remaining 1.6 weeks that English law provides (see below). Workers who have received holiday pay in the last 3 months that did not include the overtime that they usually work can bring a claim for unlawful deduction from wages. The unlawful deductions from wages legislation also permits claims to be brought back over a longer period if they form part of a ‘series of deductions’. As a result some commentators were concerned that workers may be able to make claims for the unpaid holiday which could go back years. However the EAT stated that each of deductions in a series of deductions must be made within 3 months of each other and legislation has since been introduced that from 1 July 2015 will prevent claimants going back further than 2 years from the presentation of the claim.

What is the law now?

No normal hours: Holiday pay is calculated by averaging the worker’s pay over the previous 12 weeks.

Normal hours with compulsory but not guaranteed overtime: The overtime should be included in at least 4 weeks of holiday. The remaining 1.6 weeks can be paid without the overtime being included.

Normal hours with compulsory and guaranteed overtime: All of the 5.6 weeks should include overtime pay.

Voluntary overtime: This is still unclear. However, given the importance placed on holiday pay it is likely that a tribunal would find that regular voluntary overtime should be included in holiday pay. UPDATE: The Court of Appeal in Northern Ireland has now stated that regular voluntary overtime should be included in holiday pay… However, this decision is not binding on the English and Welsh tribunals and it offers little guidance to employers so expect further clarification.  It is likely that regular voluntary overtime should be included in holiday pay.

Another point to note is that the EAT found that radius and travel time should also be included in holiday pay. Following the case of Lock v British Gas Trading Limited holiday pay should also include any commission.

The Future: Further decisions are expected which will offer greater guidance to employers.  In the meantime, please get in touch if you need guidance on what holiday you should be paying your employees.