Out-Law News 4 min. read

EAT: "non-guaranteed overtime" payments should be reflected in holiday pay but claim for years of back pay fails

Employees that receive regular payments for non-guaranteed overtime should have those payments reflected in holiday pay calculations, the UK's Employment Appeal Tribunal (EAT) has ruled. The extent to which this applies to voluntary overtime as opposed to overtime that is required by the employer is still open to debate.

Businesses will not face action for holiday back pay dating back years, as business groups including the Federation of Small Businesses (FSB) and Institute of Directors (IoD) had feared, because the ruling only covers the last three months.

Ruling in three related cases, and having heard arguments from five QCs, Mr Justice Langstaff ,said that such payments were part of "normal remuneration" for the purposes of the 1998 Working Time Regulations (WTR), which implement the requirements of the EU's Working Time Directive (WTD) into UK law. The WTD requires employers to give workers a minimum of four weeks paid annual leave each year and this ruling relates only to those 20 days.

Additionally, the president of the Employment Appeal Tribunal  found that travel time payments for more than expenses incurred, which amounted to additional taxable remuneration, should also be reflected in holiday pay.

"Despite the subtlety of many of the arguments, the essential points seem relatively simply to me," the judge said. "'Normal pay' is that which is normally received ... In cases such as the present, … where the pattern of work is settled, I see no difficulty in identifying 'normal' pay for the purposes of EU law, and accept that where there is no such 'normal' remuneration an average taken over a reference period determined by the member state is appropriate."

"Insofar as the test seeks an intrinsic or direct link to tasks which a worker is required to carry out (stressing those last four words) it would be perverse to hold that the overtime in these cases was not. In my view, therefore, Article 7 [of the WTD] requires and required non-guaranteed overtime to be paid during annual leave," he said.

However, this would only apply to the basic four weeks' leave granted under the WTD and not the additional 1.6 weeks granted in the UK under the WTR, he said.

"Businesses will now need to urgently review their current holiday policies and consider what amendments need to be made to prevent further exposure and expense to the business," said employment law expert Ed Goodwyn of Pinsent Masons, the law firm behind Out-Law.com. "Could this change how UK companies pay their workforces? Absolutely. Organisations which rely on overtime - particularly those in seasonal industries such as retail - may choose to control costs by limiting or even abolishing overtime."

"Of course, this ruling is not the end of the story. A battleground will open up as businesses grapple with exposure to bonuses and voluntary overtime and how they factor in to how holiday pay is calculated. The unions are likely to pursue the back pay issue further, and we can expect an appeal to be lodged with the Court of Appeal," he said.

The judgment involved employees from three firms: road maintenance business Bear Scotland and Hertel and Amec, both of which hired workers on a site at West Burton, England. The UK government, which intervened in the case on the side of the employers, said that it had commissioned a "taskforce" to assess the implications of the judgment "as a matter of urgency". The taskforce includes UK business lobby groups the Confederation of British Industry (CBI), the IoD, the FSB and the British Retail Consortium, all of which have criticised the ruling.

Currently, most UK organisations calculate holiday pay based on an employee's basic salary. However the CJEU, which is the EU's highest court, has previously ruled that the WTD requires the inclusion of other types of payment in the calculation. In 2012, the Supreme Court ruled that a group of British Airways pilots should have two supplements contained in their terms of employment included in calculations of holiday pay, having referred the case to the CJEU. Earlier this year, the CJEU ruled that an employee whose "normal remuneration" included regular commission as well as a basic salary must have that commission taken into account for the purposes of calculating holiday pay, in a case referred by the UK employment tribunal. Quoting the British Airways case, the CJEU said that "normal remuneration" was that which was "directly" or "intrinsically linked" to the employee's work for the company.

Mr Justice Langstaff refused to refer the current cases back to the CJEU as its interpretation of the WTD was clear from these two cases.

Moving on to look at the domestic WTR, the judge said that these "distinguished between overtime which was not guaranteed, which was not to be taken into account in assessing 'how much', and overtime which was guaranteed, which was". He said that the UK parliament's approach to the regulations "was deliberate, designed to reduce the costs to employers of funding holiday pay on the one hand, whilst ensuring that workers enjoyed a longer holiday than was provided for as a minimum under European legislation".

His judgment restricted claims for holiday pay underpayments to those that applied to the last three months, unless the failure formed part of a "series of deductions" ending within that three-month period.

"This part of the ruling is certainly positive for employers because there will be little immediate prospect for back pay claims going back years thereby alleviating concerns that this will be the next PPI-style scandal that was predicted to clog up the tribunal service," said employment law expert Ed Goodwyn. "Employees are in line to be paid more in the future and while this incurs additional cost to companies, UK businesses will no doubt be relieved that an onslaught of back pay claims will now be unlikely."

Pensions expert Carolyn Saunders of Pinsent Masons said that the decision could also affect those pension schemes that include variable elements, such as bonus and commission, in the pay that is used to calculate benefits and contributions.

"Both defined benefit and defined contribution schemes could be affected," she said. "The administrative costs of sorting out the past underpayments could be significant. There will be no impact on schemes that use only basic pay to calculate benefits and contributions."

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