Reflecting on the highly publicised recent decision of the Employment Appeal Tribunal employers who have not accounted for overtime payments in holiday pay are probably wondering what their next move should be.
For those who missed the news, the current position in terms of overtime and calculating holiday pay can be summarised as follows:
- Where the worker works normal working hours, overtime pay arising from the following types of overtime will have to be included in the holiday pay calculation:
- Guaranteed (compulsory) overtime in relation to the full 5.6 weeks statutory minimum holiday entitlement.
- Non-guaranteed overtime where the employee is required to work. This applies to the minimum 4 weeks statutory minimum holiday entitlement. This does not apply to the additional 1.6 weeks’ leave under which only guaranteed (compulsory) overtime is taken into account in respect of workers who work normal working hours – see previous bullet point. This principle is subject to appeal – see below.
No definitive conclusion has been reached about voluntary overtime. This is overtime where an employer does not have to offer work and if offered, an employee does not have to accept it. It is therefore open to debate in these circumstances if voluntary overtime it should be included in the calculation. If however there is a settled pattern over a sufficient period of time it may have to be taken into account. An employer’s day-to-day practices in relation to voluntary overtime will be key to identifying if there is a potential liability; employers should keep this under review and if in doubt further advice should be taken.
Normal working hours arise where a worker’s contract sets out a fixed number of hours in a week or specific period.
- Where there are no normal working hours, pay will be calculated as an average of all the sums earned in the previous 12 working weeks, which will include any overtime payments.
Before the decision, employers should have in any event already been accounting for overtime payments in holiday pay, unless the overtime was purely voluntary where there are normal working hours. Since the decision, overtime payments for non-guaranteed overtime where there are normal working hours must be accounted for.
Grounds of appeal
The matter does not end here as the Employment Appeal Tribunal (“EAT”) has granted leave to appeal to both the employers and the employees. If the further litigation does follow, the Court of Appeal will be asked to consider on behalf of the employers whether the EAT was right to conclude that payments for non-guaranteed overtime should be taken into account when calculating holiday pay where a worker works normal working hours.
The EAT in its decision also limited a workers ability to bring backdated claims for underpaid holiday. This means that workers cannot use each shortfall in holiday pay as part of a series of deductions for the purposes of an unlawful deduction of wages claim where a period of more than three months has elapsed between the deduction (underpayment). The EAT has also granted leave to the employees to appeal this point, noting that it is “arguable as well as in the public interest”.
An uncertain position
There is therefore still some uncertainty as to what the final position will be in terms of whether non-guaranteed overtime where there are normal working hours should be accounted for, and whether concerns about significant retrospective claims for unpaid holiday will again become a live concern.
Employers should assess the risk
What an employer chooses to do in response to this decision will depend upon the level of financial risk in relation to historical and future claims and what the employer’s tolerance would be to that risk.
Before taking any action, a sensible starting point would be to work out the size of the issue in relation to overtime; this would also be a good time to ensure other supplementary payments such as shift allowances, attendance bonuses or commission are also being treated correctly.
Employers can then decide whether they need to make accruals for possible claims and whether they need to or want to make changes.
Some employers may choose to do nothing and wait to see what happens in relation to the appeal. Our view however is that even if the decision is to do nothing this should be on an informed basis, made only following a full legal compliance and financial risk assessment. The worst case scenario for employers is that the Court of Appeal will uphold the EAT’s decision about the inclusion of non-guaranteed overtime being accounted for in holiday pay and that the limit put on backdated claims will be removed.
Bear Scotland Ltd v Fulton and Baxter
Hertel (UK) Ltd v Woods and others
AMEC Group Ltd v Law and others
For more details about how to deal with the issue of holiday pay, overtime payments and other supplementary payments please contact:
+44 (0) 1604 871143
This update is for general guidance only and does not constitute definitive advice.