12th February 2015
Holiday pay to include "non guaranteed" overtime under Working Time Regulations
This is the decision of the Employment Appeal Tribunal in the combined cases of Bear Scotland Ltd -v- Fulton and Baxter, Hertel (UK) Ltd -v- Wood and Amec Group Ltd v Law.
The Judgement was handed down by the EAT on 4th November 2014
The Working Time Directive provides that full time workers should be given four weeks paid annual leave per year. Part time workers are to be given a pro rata amount of leave. The holiday pay should be based on “normal remuneration” averaged over “a representative pay period” (more on this below).
The Working Time Regulations is national legislation which must implement the Working Time Directive into UK law. The UK’s regulations are more generous to workers in that it provides full time workers with 5.6 weeks of annual leave per year, 8 days more than the minimum stipulated by Europe.
Up until now UK employers have been calculating their employee’s holiday pay based on their basic salary only. Where an employee’s remuneration varies from week to week, say because they work different hours, UK employers have been calculating their week’s pay based on an average of the previous 12 weeks earnings. This is how the UK’s Employment Rights Act 1996 tells us to make the calculation.
The test cases and the EAT’s decision
Employees of three companies – Engineering Company, Amec, Industrial Services firm Hertel and Maintenance Company, Bear Scotland bought test cases arguing that the UK had been misinterpreting European legislation and that their holiday pay should have been based on their “normal remuneration”; i.e. that their holiday pay should have included their overtime payment and other payments associated with their work. The EAT agreed with the employees.
The key elements of this landmark decision are that:
- Workers are entitled to be paid their “normal remuneration” and that should include “non guaranteed” overtime which the employee is obliged to work. (Note that the judgement distinguishes between non guaranteed but obligatory overtime and voluntary overtime).
- Payments for travelling time which is intrinsic to the role performed by the employee (i.e. not the normal commute to work) should be included in the calculation.
- This ruling only applies to the four weeks leave granted by the European Working Time Directive. It does not apply to the extra eight days leave UK workers enjoy under the Working Time Regulations. Pay for those extra days leave can still be paid at basic salary only.
- Claims for unpaid holiday pay will be considered out of time if there is more than three months gap between the underpayments. This is a relief for employers who feared underpayment claims stretching back years.
What other key decisions are likely in the future?
The hearing on whether UK employers should be including sales commission in holiday paid will be heard in February 2015. This follows the Advocate General’s Opinion in the case of “Lock -v- British Gas Trading Ltd” that sales commission should be included. The Opinion is in line with other European decisions that the purpose of annual leave is for rest and recuperation. Anything that discourages workers from taking their holiday, such as reduced pay, is essentially a health and safety issue and is contrary to the important principal of European social law. It is highly likely that the tribunal hearing the Lock case will be decided in line with Bear Scotland and determine that sales commission should be included in holiday pay.
What should employers do now?
Employers are urged to consider with their legal advisors how to:
- Make swift preparations to increase their workers holiday pay in line with the EAT judgement.
- Handle potential claims from employees for backdated holiday pay.
- Budget for other elements of pay which should also be included in holiday pay in the future such as sales commission and stand by payments.
- Decide what reference period will need to be taken into account when calculating holiday pay. Unfortunately the EAT judgement does not clarify what this should be. In the case of sales commission and (and possibly overtime) should it be the 12 weeks (as provided by UK law) or the past year to take into account the peak and troughs in sales and customer demand?