As has been seen in the press this week, a landmark judgment by the Employment Appeal Tribunal (EAT) was announced on Tuesday which could have significant implications for employers. Having now considered the judgment, here is our initial guidance on the ramifications.

The judgment has confirmed that non-guaranteed overtime (along with certain other comparable payments) must be included in the calculation of holiday pay (which is considered further below).

The much publicised EAT decision covered the issue of holiday pay in three cases: Bear Scotland v Fulton and Baxter (Bear); Hertel (UK) Ltd v Wood and others (Hertel); and Amec Group Ltd v Law and others (Amec).

By way of background, the holiday pay claims have arisen due to an apparent conflict between UK law and European law as to how holiday pay should be calculated and in particular whether types of remuneration such as overtime and commission should be included in such calculations.

The Working Time Directive (Directive) entitles workers to 4 weeks’ annual leave but does not specify how pay should be calculated. Decisions in the European Court of Justice have stressed that during a period of annual leave, the worker should receive their “normal” remuneration (which, in those decisions included, for example, commission and certain allowances).

The Directive was bought into UK law by the Working Time Regulations 1998 (WTR) and under the WTR, workers are entitled to 5.6 weeks’ annual leave and must be paid at the rate of a week’s pay for a week’s leave. The Employment Rights Act 1996 sets out how to calculate a week’s pay and overtime would be excluded from this calculation if there are “normal working hours” unless the overtime is compulsory and guaranteed and this is why there is a conflict.

So what has the decision in the cases of Bear, Hertel and Amec confirmed?

a. That non-guaranteed overtime (this being overtime which the employer does not have to offer but which the worker is expected to work if offered) must be included when calculating a worker’s holiday pay. There is no definitive statement in the judgement about purely voluntary overtime (this being overtime which the employer does not have to offer and the worker does not have to accept) but given the underlying ethos in the various European Court of Justice cases, it could be that voluntary overtime which is regularly worked by the worker would count as “normal” remuneration.

b. That remuneration such as non-guaranteed overtime, commission, allowances etc. should be included in holiday pay calculations but only for the 4 weeks’ annual leave permitted by the Directive (20 days) and not the additional 1.6 weeks permitted by the WTR (8 days).

For a typical full time worker in England who receives 28 days annual leave per annum (inclusive of the 8 recognised and customary public holidays), this means that they can expect to receive a higher rate of holiday pay for 20 days (which, for example, would include non-guaranteed overtime, commission and other allowances) and 8 days being paid at the basic rate.

c. That an underpayment in respect of holiday pay (categorised as a deduction from wages) which is separated from the next such underpayment (often described as a “series”) by a period of more than three months is out of time for a claim to be brought (subject to the reasonable practicability test).

The EAT also held that payment for the additional 1.6 weeks annual leave provided by the WTR, which it indicated would be the last annual leave to be agreed upon during the course of a holiday year, cannot form part of the series of deductions which the worker can claim. This therefore decreases the chances for holiday pay claims to go back over a number of years.

What now?

The ruling could be appealed to the Court of Appeal but timescales for a final decision on this subject are currently unknown. It could be years away, however, there is the possibility that it could be more imminent if any appeal is fast tracked.

Also, following the judgment being announced, Vince Cable, Business Secretary, has announced a new task force is to be set up in order for an assessment of the impact of this ruling to be discussed, including the issue of back dated holiday pay.

Practical considerations

• The 4 weeks’ annual leave required by the Directive and the additional 1.6 weeks’ annual leave provided by the WTR are to be paid at different rates.

From an administrative perspective, this will be difficult for employers as there will be different levels of holiday pay to pay.

An employer may take the decision to keep things simple and calculate “normal” remuneration for the entire 5.6 weeks.

• Employers need to bear in mind the following types of remuneration should be considered when calculating holiday pay for the 20 days annual leave under the Directive (as a result of the EAT decision and the European Court of Justice decisions):

• Commission payment

• Guaranteed and non-guaranteed overtime that is regularly worked

• Incentive bonuses

• Travel time payments (not expenses, but payments for the time spent travelling)

• Shift premia

• Seniority payments (payments linked to qualifications / grade / experience)

• Stand-by payments

• Review historic annual leave records for the current holiday year to see where underpayments in holiday pay may have been made and whether there has been more than a 3 month gap since any underpayment in holiday pay to assess potential liability and consider budgeting in the event of claims.

• Employers may also want to consider working practices going forward and for the future. For example, limiting non-guaranteed and offering voluntary overtime or agency staff instead offering the overtime to permanent workers.

By Susan Barker (Senior HR Consultant) and Anil Champaneri (HR Consultant), Alcumus

Reference sources: Lexology