IMploy | What has to be included in holiday pay?

When an employee takes annual leave, how much should they be paid? You might think that this should be a straightforward question, but it is proving to be one of the biggest and potentially most costly employment issues of 2014-15 and one that has generated widespread publicity following the recent decisions on overtime in the cases of Wood and others v Hertel and Fulton and Bear Scotland Limited that was delivered on 4 November 2014.

Glenn Hayes unravels this decision and provides advice on whether businesses should include overtime when calculating holiday pay under the current law.

The Hertel case

This case was brought by a number of workers whose employment contracts stated that their normal working hours were 38 hours per week. Their employers were not obliged to provide overtime, but if they did the workers were contractually obliged to accept it (a practice known as non-guaranteed overtime). In practice, the workers undertook six hours of overtime each week for which they were paid.

The EAT said that these overtime payments must be included in holiday pay. The overtime was regular and had become part of their normal hours.

Non-guaranteed overtime that does not follow a regular pattern must also be included. However, this will need to be averaged over a (probable) 12 week reference period (although it may be possible for businesses to adjust this reference period if it can show that it is not representative of business practice). This might be the case where there are fluctuations in demand for overtime over the course of customer contract.

Does the requirement to include some overtime payments apply to all paid holiday?

No. The EAT made it clear that non-guaranteed overtime payments only have to be included for the first 4 weeks holiday taken. 

That is because this EAT ruling can only affect workers’ entitlement to their four weeks’ leave under the European Working Time Directive not the additional 1.6 weeks leave that the UK Government gives us under our domestic legislation. 

How far back can workers bring claims? 

Workers will be able to bring claims in the Employment Tribunal under:

  1. The Working Time Regulations; or 
  2. As a series of unlawful deductions from wages.

However, both claims have to be brought within three months of the underpayment otherwise the tribunal will not be able to hear them and they will be brought out of time. In addition, a worker cannot claim that he has suffered a ‘series’ of deductions (and so potentially go back many years) if there are more than three months between payments where there is a shortfall.

Employees may seek to use the civil courts and claim underpaid holiday as a debt. However, there are no cases on this and there are strong arguments to suggest that in most cases, employees will not have a choice of forum and will have to use the Employment Tribunals to resolve these issues. 

Is the claim likely to be appealed?

The EAT gave permission for the parties to appeal against the decision and any appeal notices had to be lodged by 25 November 2014. According to a recent report, Unite (who represented the workers in these cases) has announced that it is not going to appeal. This is surprising as it was widely anticipated that the Union would appeal against the limitations imposed in respect of a worker’s right to bring historic claims for underpayments as a series of unlawful deductions, particularly as the EAT itself conceded that this aspect of its decision was ‘arguable’. We do not yet know if the respective employers are going to appeal but it is difficult to see the Court of Appeal reaching a different decision with regard to the requirement to incorporate non-guaranteed overtime into a worker’s holiday pay. An appeal on this point is therefore thought to be unlikely.

Does this decision affect pension schemes?

Potentially yes. My colleague Nigel Bolton provides advice about this.

Summary - overtime:

  1. Non-guaranteed overtime that is regular or intermittent MUST be included in holiday pay. 
  2. Voluntary overtime does not have to be included (but this position is likely to be challenged).
  3. Unpaid overtime does not have to be included.
  4. It is not yet clear whether contractual overtime that the employee can decline on reasonable grounds must be included, but it is likely to. This point will be decided in the case of Fulton v Bear Scotland which has been remitted back to a tribunal (although no date has yet been set to determine this). 
  5. Businesses will only have to include relevant overtime in respect of the first four weeks of workers’ annual leave. Any additional leave (including contractual leave) does not have to include this. 
  6. Businesses will be able to argue that all holiday taken in excess of the four weeks leave required under the Directive was correctly paid and in most cases this will ‘interrupt’ (and therefore break), what otherwise might have been a ‘series’ of deductions.
  7. Workers will not be able to recover underpayments of holiday pay going back many years if there has been an interruption of three months or more in the amount paid or the time between payments.

What should businesses do now?

There are other decisions in the pipeline that will impact on whether all commission payments should be included in the calculation (under UK law, commission is only included if the employer does not have any normal working hours). Plus we anticipate that arguments will start to be raised about whether bonuses (rather than commission) should also be included in the calculation.

We have developed cost effective strategies to support businesses which will help you to minimise your exposure to such claims.

Please contact me, or one of my partners for more information about how we can help you. 

Key Contact

Glenn Hayes