SUMMARY: The EAT is due to consider 2 cases in relation to whether overtime payments should be taken into account when calculating holiday pay on 30 and 31 July 2014.
Employees are entitled to be paid at the rate of a week’s pay in respect of each week of annual leave to which they are entitled in relation to their statutory 5.6 weeks’ (or 28 days’) holiday entitlement (to include public holidays).
A week’s pay is 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 due to the time that they work (shift work) or the amount of work done (piece work), varies.
Where a worker does not have normal working hours (for example, they do not have to work a minimum number hours per week), their holiday pay should be calculated to include any overtime payments and commission earned in the past 12 weeks (and then averaged).
This update considers the position in calculating holiday pay in relation to the first category of employees (those with normal working hours).
There are a number of cases which deal with the issue of overtime payment and holiday pay where an employee has normal working hours. Whilst guidance is given, there is no definitive position as to whether overtime should be taken into account when calculating holiday pay.
Original indications that it is not necessary to take overtime into account
It has been thought that only overtime that is obligatory on both sides (ie the employer is obliged to provide it, and the employee is obliged to work it) constitutes part of the worker’s normal working hours. This triggers the right for it to be taken into account for the purposes of holiday pay.
A Court of Appeal case (Bamsey and ors v Albon Engineering and Manufacturing plc 2004) held that where an employee works compulsory, but not guaranteed, overtime, they are not entitled to be paid an equivalent amount during the holiday period, but just their contractual hours.
An employment contract might state whether overtime is guaranteed or not. If the contract is silent (or if the reality contradicts the contract) as to overtime being guaranteed, if employees are regularly working overtime, it could be argued that a contractual term has been implied into the contract that overtime is part of their normal hours (and therefore should be taken into account when calculating holiday pay).
More recent cases
It is now however doubtful whether this case (Bamsey) is compliant with EU law and an ECJ decision (British Airways plc v Williams and ors) suggests that supplementary payments should be maintained during annual leave to the extent that they are “intrinsically linked” to the performance of contractual duties. In principle, such payments might include bonuses, commission, overtime pay, performance-related pay, call-out supplements and anti-social hours allowances.
A recent Employment Tribunal decision has followed the ECJ decision on this point (Neal v Freightliner Ltd). This case suggests that overtime should be taken into account in calculating holiday pay even where it is voluntary as opposed to compulsory. It only applies to the first 4 weeks of annual leave. It should be noted that this is only an Employment Tribunal decision and not binding.
An Employment Tribunal in Scotland also came to a similar decision (Fulton and anor v Bear Scotland Ltd).
However, an employment judge took a different view in Elms v Balfour Beatty Utilities Solutions Ltd. The judge held that a worker’s holiday pay could be calculated with reference to his basic pay for his 40 “normal working hours” a week. Overtime payments, standby payments and bonus payments did not need to be taken into account.
The Neal v Freightliner Ltd case and the Scottish case are due to be heard by the Employment Appeal Tribunal (EAT) on 30 and 31 July 2014 (originally these were scheduled for 10 April 2014). However, the judgment may be delivered on a later date.
Where overtime is both compulsory and guaranteed it should be taken into account when calculating holiday pay.
However, as you can see, there is significant uncertainty as to whether overtime should be taken into account in other instances when calculating holiday pay, where an employee has normal working hours. The EAT case in July may resolve this.
In the meantime, employers who are considering whether to take overtime into account should take legal advice. On the one hand, taking overtime into account may reduce the risk of unlawful deduction from wages claims, on the other it may create an unnecessary contractual entitlement to overtime being taken into account in the future.
If employers await the EAT’s judgment, they should bear in mind that the hearing date could change again, the appeals could be withdrawn, the judgment may be delivered some time after the hearing, and the judgment may be appealed.
For more details about calculating holiday pay please contact:
+44 (0) 1604 871143
This update is for general guidance only and does not constitute definitive advice.