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Holiday Pay and Overtime

30th November 2014

The Employment Appeal Tribunal has given an important ruling this month relating to the calculation of holiday pay, and the use of overtime in the calculation of the actual amount of holiday pay that the employee is entitled to receive. The case has resulted in a lot of publicity, much of which fails to accurately report the decision and the effect of the decision of the Employment Appeal Tribunal. Some reports suggest that only compulsory overtime pay is to be used in calculating the holiday entitlement of the employee, but the problem with this interpretation (which is incorrect) is the fact that "compulsory" is given different meanings by different employer.

For a few years the decisions of the European Courts have been indicating that the basis of calculation of holiday pay set out in the Employment Rights act 1996 does not accurately reflect the true obligation set out in European law. The problem arises because the Employment Rights act 1996 uses wording for definition of "weekly pay"- which was then adopted in the Working Time Regulations to govern holiday pay in the UK, which fails to include a number of elements of pay that an employee may receive, even those amounts that they may receive on a regular basis, such as certain overtime, bonuses, commissions etc. There has been a case this year which makes clear that commission payments need to be factored into the calculation of holiday pay. This latest case  called Bear Scotland v Fulton addresses the issue directly in respect of overtime payments. 

In the Employment Appeal Tribunal  (the EAT) it was noted that the European Law requirement is to consider the pay that is usually received by the employee. The observation made was that "Normal pay is that which is normally received." In our view this could hardly be clearer or more logically obvious! However, the formula in the Employment Rights Act 1996 does not always see it that way. The effect has been that many employers have not factored the overtime payments made to employees when calculating their paid holiday entitlement. In the Employment Appeal Tribunal the point was made that it is clearly a matter of ascertaining the frequency and regularity of overtime pay to decide if it is in fact "Normal" pay for the employee in question. The argument had been put forward that only overtime which was guaranteed should be included. This was rejected by the EAT, which concluded that all normal overtime (including that which is not strictly contractually guaranteed) should be included when calculating holiday pay. 

There are a number of key points for employers to note from the case:

Employees are entitled to be paid holiday which reflects normal non-guaranteed overtime in the calculation (ie if asked to do overtime they are then obliged to carry it out and cannot decline to do it). The practical way to address this is to use average pay over the previous 12 weeks- which is the way that the Employment Rights Act 1996 already requires for those that do not have standard hours or regular set pay, or have variable amounts of work. 

That the calculation used only applies to the 4 weeks paid holiday guaranteed under European Law (ie not the full 5.6 weeks guaranteed under domestic UK law),

That travel time payments, which exceed expenses incurred and so amount to additional taxable pay should also be factored into the calculation of holiday pay,

But the employee will only be able to claim for arrears (ie any underpayment of holiday pay) which are linked by periods of under three months (this is the deadline for bringing claims for unlawful deductions in the Employment Tribunal).

There are a number of practical implications to the decision. 

Firstly employers need to be honest with themselves in deciding what is actually overtime and what is actually normal working hours. It seems obvious that if an employer is routinely requiring its employees to work a certain number of hours "overtime" then in fact they should actually regard regard those hours as normal basic hours (and should really pay the normal basic hourly rate for those hours of work). The problem is an historic one, where many companies have  regularly offered overtime at an enhanced rate of pay, and the employees have taken that up as a means of supplementing their take home pay. If the needs of the business are truly such that the extra hours must be worked, then employers need to face the truth and reclassify them as part of the normal expected hours, and so should not have to pay a premium rate for those hours of work. This may well require changes o the contracts for a lot of companies and employees. 

Secondly employers need to ensure that when an employee is working overtime that they are actually working effectively for that period, rather than simply being present just to earn the extra pay, or working at half rate, as the effect of the judgment of the EAT is that the company will be paying extra again in the calculation of holiday pay for the employee.

Thirdly employers need to be careful about when they agree to let employees take holiday, so that the employee does not manipulate the rate of pay by having worked very large amounts of overtime prior to it (so as to benefit from an increased rate of holiday pay above what would actually be more normal for the employee).

It is worth noting that the judgment does not deal with overtime which is genuinely optional for the employee, as that overtime pay will not be factored into the calculation of holiday pay. However the overtime will only be truly optional if the employee has the absolute right to turn down the offer or request to work holiday.

The Government has set up a taskforce to examine the implications of this case, comprising representatives from business (and none representing employee interests or employee groups). We hope that the Government does not embark on attempts to appeal against the decision, the chances of which the EAT noted had no reasonable prospect of success. It is important that employers get to grips with the impact of this case, and review their policies and practices relating to holiday and holiday pay.

If you have need any assistance in dealing with issues raised in this article do not hesitate to contact us at Hallett Employment Law Services Ltd.

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