The UK Employment Appeal Tribunal’s (EAT) long awaited judgment in the combined cases of Bear Scotland Ltd and Others v Fulton and Others UKEATS/0047/13/BI; Hertel (UK) Ltd v Woods and Others UKEAT/0160/14/SM; AMEC Group Ltd v Law and Others UKEAT/0161/14/SM (Bear Scotland) has confirmed that non-guaranteed overtime payments are to be included for the purposes of calculating holiday pay under the UK Working Time Regulations 1998 (WTR). However, the scope for workers to recover retrospective holiday pay has been significantly limited.
In the UK, only guaranteed overtime is included in the definition of a “week’s pay” for the purposes of the WTR. However, following the Court of Justice of the European Union cases of Williams and Others v British Airways plc C-155/10 and Lock v British Gas Trading Ltd and Others C-539/12, under EU law workers are entitled to “normal remuneration” whilst on holiday pursuant to the Working Time Directive 2003/88 (the Directive). In light of these cases, the judgment in Bear Scotland addressed the discrepancy between the position under the WTR in the UK versus the approach under European law with respect to the calculation of holiday pay.
The key points are:
- Overtime payments – The EAT ruled that payment for overtime which employees were required to work, though which their employer was not obliged to offer, is part of “normal remuneration” for the purposes of calculating holiday pay under the WTR and should be taken into account. It is important to note that this only applies to the four weeks’ holiday entitlement under the WTR and not the full 5.6 weeks’ annual leave entitlement under UK law. “Normal pay” is that which is normally received and it has to be made for a sufficient period in order to justify that label. In situations where workers have a set work pattern, normal pay will be easier to identify. However, where there is no normal pattern of remuneration, an average taken over a reference period determined by UK law will need to be taken.
- Backdated claims – The EAT has limited the scope for workers to bring historic claims for arrears of holiday pay. It was held that workers cannot bring claims for underpayments or a series of underpayments where more than three months has passed between the deductions. Importantly, the EAT judge ruled that “any series punctuated from the next series by a gap of more than three months” would mean that any complaint for payment under the previous series would be time barred.
It is anticipated that the decision will be appealed to the Court of Appeal and given the significance of the decision, Business Secretary Vince Cable has announced that he is setting up a taskforce to assess the possible impact of this ruling.
This decision raises a number of key considerations for employers:
- Employers will need to include overtime pay, whether guaranteed contractually or not, as well as commission, in calculating the first four weeks of annual leave payments that they provide to workers who earn overtime pay. This will lead to a large rise in annual leave bills for employers whose workforce earn significant amounts of overtime. In addition, as this requirement only applies to the first four weeks of annual leave, employers may consider having a lower rate of annual leave payments for the remaining 1.6 weeks and any further contractual holiday entitlement.
- Employers should assess the potential exposure to holiday pay claims by identifying different payments paid to workers in all parts of the business with respect to holiday. This should include both voluntary and non-voluntary overtime, commission, shift allowances and other premiums.
- Employers may consider reviewing contracts of employment and staff handbooks to ensure that they reflect the different components of holiday pay.
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Nicholas Turner, Partner
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