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7 November 2014 0 Comments
Posted in Employment, Opinion

Holiday pay must now include overtime

Author headshot image Posted by , Partner

In a landmark judgment which has received much publicity because of its wide-ranging implications for many employers, the EAT has decided the issue of overtime and holiday pay – and has held that holiday pay calculations must include overtime payments made on a regular basis, even if not guaranteed. In the conjoined cases of Bear Scotland Limited and others v Fulton and others; Hertel (UK) Limited v Woods and others; and Amec Group Limited v Law and others the issue of whether or not the calculation of holiday pay for employees and workers should or should not include overtime was decided. The EAT has held that all elements of an employee or worker’s normal remuneration, which includes payments for non-guaranteed overtime, must be included in the calculation for holiday pay under the EU Working Time Directive and that the Working Time Regulations can be construed to allow this. The emphasis is on “normal” pay, and as such it follows that overtime must have been paid for a long enough period to be a consistent payment and so class as “normal”. Employers will thus need to use a reference period to calculate normal pay and, although the EAT did not suggest what this might be, 12 weeks may well be deemed reasonable by the Courts.

This is the bad news. The better news for employers is that a significant restriction has been placed on the ability to claim retrospective holiday pay under domestic legislation. Furthermore the ruling applies only to the mandatory 20 days annual leave awarded by EU legislation. It does not apply to the additional 8 days leave provided for in the UK legislation under the Working Time Regulations, or any additional contractual leave.

During the Judgment, the ECJ cases of British Airways Plc v Williams and others, and Lock v British Gas Trading Limited, were considered in great detail. Both held, respectively, that all component parts of an airline pilot’s normal remuneration must be taken into account when holiday pay is calculated, and this included supplementary payments for time spent flying as well as allowances linked to pilots’ professional and personal status; and (in the case of Lock) commission payments, earned by a worker whose remuneration is comprised partly of basic salary and partly commission, must be included in the calculation of holiday pay alongside basic pay.

These were both ECJ cases and on this basis, the Judge considered that there was now settled ECJ case law regarding the meaning of Article 7 of the Working Time Directive (which is implemented by the Working Time Regulations in the UK). The Judge observed that “normal pay” is pay which is normally received by the worker and there was no justification for excluding payments which the individual ordinarily receives, including regular overtime. In the cases of Hertel and Amec, overtime was compulsory although not guaranteed. However the incidences of staff working overtime were sufficiently regular to count as “normal” remuneration. The Judge considered that the ECJ test, that any additional payments required an intrinsic or direct link between the payment and the work required of it to be included in holiday pay, was satisfied in these cases. As such the Judge concluded that Article 7 required overtime payments to be taken into account when calculating holiday pay.

In considering whether the Working Time Regulations, which refer to holiday pay calculation as being a “week’s pay” formula, could be construed in accordance with Article 7 of the Directive, the Judge considered not only that they could be, but they should be.

The other main issue on appeal was the extent to which holiday pay claims can be backdated under domestic law. The Judge considered carefully the decisions in Revenue and Customs Commissions v Stringer where the House of Lords (as it then was) considered that a failure to pay holiday pay under the Working Time Regulations could be brought as an unlawful deductions from wages claim, either as one, or a series of, deductions. The claim must be brought within 3 months of the date of the last in a series of deductions. Consequently it was possible to link a number of deductions together going back several years in this way.

The Judge accepted that whether or not there is a series of deductions was a matter of fact as to whether there was a link between the underpayments. However extending this principle, the Judge commented that if there is a gap of more than 3 months between any two deductions, the series would be broken. His reasoning for this is that a Tribunal does not have jurisdiction to hear a claim brought more than 3 months after a one-off deduction, or the last in a series. His reasoning was that Parliament could not have intended jurisdiction to be granted simply because one subsequent non-payment which occurred more than 3 months earlier could reasonably form part of the same series. As such, there is a significant restriction in workers’ and employees’ ability to bring backdated holiday pay claims because where there is a gap of more than 3 months in which either leave is not taken or no “unlawful deductions” have been made from holiday pay, this will break the series.

The aspect of the appeals which were lost by Hertel and Amec will probably be appealed as permission to appeal was granted on the basis of the public interest in these cases.

This decision will have many employers looking closely at their policies on holiday pay and their contracts of employment to ensure they are brought into line with the implications of this judgment.

This legal update is provided for general information purposes only and should not be applied to specific circumstances without prior consultation with us.

For further details on any of the issues covered in this update please contact Gemma Ospedale, Partner in Employment on 020 7583 2222.

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