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EAT confirms that holiday pay must include overtime

Do your workers regularly work paid overtime on top of their normal working hours?  If so, do you include an element reflecting that overtime worked in their holiday pay? 

If the answer to these two questions are "yes" and "no" respectively, you really need to be aware of the following decision…

The Employment Appeal Tribunal (EAT) has confirmed, in the cases of Bear Scotland Limited v Fulton & Others, Hertel (UK) Limited v Wood & others and Amec Group Limited v Law & Others, that when employers are calculating a worker's holiday pay entitlement for  a period of holiday accrued under the Working Time Regulations 1998, their "normal pay" must include an element which reflects the average overtime pay for overtime hours that they have regularly worked in the 12 week period prior to that holiday. 

If employers don't include overtime in the calculation, workers will be able to pursue claims for incorrectly paid holiday either under the Working Time Regulations or as an unlawful deduction from wages claim under the Employment Rights Act.  Prior to today’s decision, there was a fear that if workers pursued the latter route, they would be able to claim unpaid arrears of incorrectly calculated holiday pay going back 6 years (or in a worst-case scenario as far back as October 1998).  As a result, this issue is of significant interest both to employers and to workers. 

An important aspect to the EAT decision, which is likely to come as a significant relief for employers, is the ruling that overtime only needs to be included in the holiday pay calculation in respect of the first 4 weeks of a worker's leave in any given year, and not to the extra 1.6 weeks’ leave.  The EAT has also confirmed that if there is a break of more than 3 months between the date of incorrectly calculated payment of holiday pay for one period of holiday and the date of the next period of annual leave and incorrectly calculated holiday pay, these will amount to a separate series of deductions, rather than a sequence in the same series of deductions.  Depending on the circumstances of the worker’s case, this could well mean that many claims will be limited to the incorrectly calculated holiday pay entitlement in the current holiday year, rather than 6 years’ arrears referred to above. 

What is the impact of this decision? 

The most obvious impact is that holiday pay will be more costly for employers going forward, but the reduction in the historic impact is also relevant. 

The decision has attracted widespread publicity in the media, and as a result you can expect to receive queries from your workers about whether you are proposing to make payments to them for unpaid holiday on a voluntary basis.

It is likely that the decision will be subject to at least one further appeal, so it is unlikely that the EAT's decision will be the final word on matters.  As at the time of sending this, there is no news as to whether any of the workers who brought the claims intend to appeal the 3 month point referred to above, nor whether any of the employers intend to appeal the overtime ruling, but given the significance of this issue in particular an appeal by the employers can’t be ruled out.  For what it’s worth, I think that if the employers did appeal, the prospects of success would not be good, and the decision will stand. 

What is clear is that this issue will not go away. If you have workers who regularly work paid overtime, equally if you have workers who earn commission on top of their basic salary, you should consider taking advice about the options open to you as a priority.  There are a number of issues to consider, such as:

  • How are you going to calculate workers' holiday pay?
  • Are you going to include overtime pay in all of a worker's holiday pay calculation or just the first 4 weeks holiday in any year
  • Should you change your overtime arrangements?  If so, how and how will you implement this change?

If you would like further information or assistance then please do not hesitate to contact our Head of Employment, Paul Ball, on 0113 246 2312 or via paulball@3volution.co.uk 

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