Calculating holiday pay: overtime is overdue | Practical Law

Calculating holiday pay: overtime is overdue | Practical Law

The Employment Appeal Tribunal has handed down its eagerly anticipated decision on the correct calculation under the Employment Rights Act 1996 of a week’s pay for the purposes of calculating holiday pay. The decision means that, subject to any appeal, employers will be obliged to take certain allowances and overtime into account when calculating holiday pay. However, there is much better news for employers with regard to back pay claims.

Calculating holiday pay: overtime is overdue

Practical Law UK Articles 6-589-4746 (Approx. 4 pages)

Calculating holiday pay: overtime is overdue

by Stuart Neilson, Pinsent Masons LLP
Published on 27 Nov 2014 • United Kingdom
The Employment Appeal Tribunal has handed down its eagerly anticipated decision on the correct calculation under the Employment Rights Act 1996 of a week’s pay for the purposes of calculating holiday pay. The decision means that, subject to any appeal, employers will be obliged to take certain allowances and overtime into account when calculating holiday pay. However, there is much better news for employers with regard to back pay claims.
The Employment Appeal Tribunal (EAT) has handed down its eagerly anticipated decision in the conjoined cases of Bear Scotland Ltd v Fulton and others, Hertel (UK) Ltd v Woods and others and AMEC Group Ltd v Law and others on the question of the correct calculation under the Employment Rights Act 1996 (ERA) of a week's pay for the purposes of calculating holiday pay under the Working Time Regulations 1998 (SI 1998/1833) (WTR) (UKEATS/0047/13, UKEAT/0160/14 and UKEAT/0161/14).
In doing so, it has also ruled on the admissibility of, and time limits that apply to, claims for unlawful deductions in respect of underpaid holiday pay under the WTR.
The decision means that (subject to any appeal) employers will be obliged, in calculating holiday pay, to take into account overtime that employees are required under their contract to work and any allowances that are referable to the work carried out to the extent that they go beyond the reimbursement of expenses.
However, there is better news for employers with regard to back pay claims. The EAT has held that it is not possible to bridge a gap of three months or more in any series of deductions claim under the ERA in respect of holiday pay. This means that employees not only have to bring their claim within three months of the last deduction in a series, they cannot go back beyond any single gap of three months or more.

First instance rulings

In the UK, employment tribunals have heard a number of cases on the issue of whether British Airways plc v Williams should, or could, be applied in the context of the WTR (C-155/10) (see box "Background"). In three of those cases, Bear Scotland, Amec and Hertel, the employees had all been successful in arguing that their holiday pay should include non-guaranteed overtime.
In Amec and Hertel, the employees were unsuccessful in arguing that their holiday pay should also include certain allowances under the terms of a national agreement (the National Agreement for the Engineering Construction Industry (NAECI)). The employers appealed on the issue of the overtime and the employees in Hertel and Amec appealed on the issue of the allowances.

The EAT decision

The EAT dealt with five specific issues:
  • What does Article 7 of the Working Time Directive (2003/88/EC) (the Directive) (Article 7) require by way of paid annual leave? The EAT was clear that Article 7 requires non-guaranteed overtime to be paid during annual leave. While on holiday, an employee is entitled to normal remuneration, and where there is no normal remuneration, an average taken over a reference period determined by the EU member state is appropriate.
  • Can regulation 16 of the WTR be interpreted to give effect to Article 7? The EAT answered that it could, and noted that it could be achieved by amending regulation 16(3)(d) of the WTR by inserting the words "and, in the case of the entitlement under regulation 13, sections 223(3) and 234 do not apply". The effect would be to include non-guaranteed overtime in the calculation of holiday pay.
  • Was the tribunal entitled to find that there was a series of deductions under the unlawful deductions provisions of the ERA in respect of the non-payment of holiday pay going back over several years in Hertel and Amec? This is likely to be the most controversial aspect of the decision. The EAT ruled that a claim that seeks to include previous deductions on the grounds that they form part of a series under the ERA, cannot include any deductions that predate a gap of three months or more in the series.
    When combined with the EAT's view that regulation 13 holidays (that is, the 20 days required under the Directive) must be assumed to be taken first in any holiday year with the additional eight days (provided in the UK under regulation 13A of the WTR) or contractual holidays following thereafter, the result is that in many cases there will be a three-month gap or more at the end of every holiday year, and so claimants will be precluded from going back beyond that point.
  • Should pay in lieu of notice be calculated on the same basis as holiday pay in Hertel and Amec? The EAT considered that it should.
  • Should two allowances under NAECI have been included in the calculation of holiday pay? The EAT found that they should, to the extent that they did not represent the reimbursement of an actual expense, which, in this case, meant the extent to which they were taxable rather than non-taxable.

Implications for employers

The case has very substantial ramifications for employers. While leave to appeal has been granted on all five points, the EAT made it clear that it did not see reasonable prospects of success in an appeal on the first two points. Accordingly, employers should now seriously consider amending their arrangements for the payment of future holiday pay to include overtime and appropriate allowances.
Allowances that are intended to cover actual expenses should be clearly demarcated as such. Whether or not overtime that is truly voluntary should be included remains uncertain. However, if it is paid on a reasonably regular basis, it would be prudent to include it. There is also uncertainty over the reference period that should be used; although a 12-week period is likely to be prudent until the government intervenes to spell out other reference periods that might be used.
The government has set up a task force to consider the implications of the EAT's decision. It is to be hoped that it will ultimately bring forward legislation to clarify exactly what employers should be including in holiday pay and how that should be calculated.
Stuart Neilson is a partner at Pinsent Masons LLP.

Background

Employers are obliged to provide 20 days' paid holiday to all full-time workers with a pro-rata entitlement for anyone who works less than full time (Article 7, Working Time Directive (2003/88/EC)) (the Directive). There is no express stipulation under the Directive as to how to calculate the pay for holidays.
The Directive was implemented in the UK through the Working Time Regulations 1998 (SI 1998/1833) (WTR), under which holiday pay is calculated by reference to a week's pay under sections 221 to 224 of the Employment Rights Act 1996 (regulation 16, WTR). Broadly, this provides that, for those with normal working hours, their week's pay will be their basic pay (excluding non-guaranteed overtime, allowances and commission), whereas for those without normal working hours, the pay is based on an average of a week's pay over a 12-week reference period before the holiday.
In a number of decisions over the last ten years, the European Court of Justice (ECJ) has considered the question of what a week's pay should be under the Directive (Robinson-Steele v R D Retail Services Limited C-131/04; see News brief "Holiday pay: roll-up, roll-up"; and Stringer v Revenue and Customs Commissioners C-520/06; see News brief "Sick leave and holiday pay: employers count cost of ECJ ruling").
This culminated in British Airways plc v Williams, where the ECJ held that a week's pay under the Civil Aviation (Working Time) Regulations 2004 (SI 2004/756) should, in effect, be a week's normal remuneration and should therefore include overtime and allowances that were not simply the reimbursement of an expense (C-155/10, see feature article "Statutory holiday pay: time off or time for employers to worry?").