Overtime to be included in Holiday Pay; Employers no longer walking on sunshine

David-Ward-h&s

David Ward

The long anticipated Employment Appeal Tribunal (EAT) judgment in the conjoined cases of Bear Scotland Limited v Fulton, Hertel (UK) Limited v Wood & Others and Amec Group v Law & Others has been delivered today.

In my two previous blogs of the 28 July and 15 October I discussed at length the implications the decision could have for UK employers who have workers who carry out voluntary (“non-guaranteed”) overtime.

The Judgment

The EAT has now ruled that ‘non-guaranteed’ overtime should be taken into account when calculating a worker’s entitlement to holiday pay because workers are entitled to be paid their ‘normal remuneration’ whilst taking holiday.  This means that workers are now entitled to receive average pay (taking into account any overtime they may have worked), instead of basic pay, thus leaving them financially no worse off as a result of taking holiday.  Previously they would only have been entitled to receive basic pay.

The judgment also makes clear that certain allowances that are intrinsically linked to the performance of the worker’s role will also be included in the definition of ‘normal remuneration’.

However, this is not as straightforward as it seems.  This ruling only applies to the 4 weeks of holiday workers are entitled to under the EU Working Time Directive (WTD), not the additional 1.6 weeks’ holiday UK workers are entitled to under the Working Time Regulations 1998 (WTR).

The implications for employers

In practical terms this judgment means that employers are now required to pay workers their ‘normal remuneration’ (taking into account any overtime they have worked) for the 4 weeks of leave under the WTD, but not for the 1.6 weeks of leave under the WTR. This raises the daunting administrative nightmare of employers needing to operate a two-tiered system for administering and paying one employee two different rates of holiday pay entitlement.

Backdated claims for unpaid wages

The biggest fear for employers and the UK Government arising from these appeals was that the EAT’s decision would open the floodgates for substantial unlawful deduction from wages claims. The concern was that Employees would in theory be able to claim underpaid holiday pay back to 1998 (when the WTR came into force) on the basis that each underpayment constituted one of a series of deductions.  The ramifications for employers were clear to see as estimates of underpaid holiday pay liabilities were in the hundreds of millions of pounds.

However, it appears that the EAT has thrown employers a lifeline.

The EAT did not think that it was right that if there were large gaps between holidays taken by a worker, their right to bring a claim based on a series of underpayments should still be preserved.  The usual time limit to present a claim to the Employment Tribunal is 3 months.  The EAT concluded that Parliament must have intended this time limit should apply to any underpayment claim.  Therefore, if an employee brings a claim for a series of deductions from wages (within 3 months after the last underpayment) the Tribunal will have no jurisdiction to order payment in respect of any underpayment which is more than 3 months earlier than its successor in the series. A gap of 3 months or more breaks the chain.

This ruling will allow employers to breathe a sigh of relief as it effectively limits how far back an employee can go to recover underpaid holiday pay.

What next?

Experts are currently poring over the decision to see what it means for both employers and employees alike.

The EAT has already come in for some criticism of that part of its reasoning which limits the ability of employees to claim underpaid wages as part of a series of deductions.  Crucially, the EAT did not answer the question how far back claims can go if there is no period of more than 3 months between periods of holiday.

Leave to appeal has been granted, so expect further litigation on this subject before we get a definitive answer.

For now, employers have some clarity as to what their potential liabilities for paying holiday pay are – as well as some comfort that the EAT has limited the scope for historic claims. Employers now need to get their houses in order to ensure that, going forward, they are paying the correct amounts.  This makes them compliant with the law, and will also have the effect of limiting the claims for underpaid holiday pay which are certain to follow this judgment.

Employees, on the other hand, have a very limited window in which to take action if they believe they have been underpaid.  With the ability to recover underpaid holiday pay limited to the 4 weeks of WTD holiday entitlement, and the judgment coming as late as it does in most holiday calendars, employees will have to move quickly if they are to ensure that their claims are lodged before the expiry of the 3 months limitation period which applies to all Tribunal claims.

The Government’s response

Due to the potentially disastrous effect this judgment could have had on the UK economy the Government took keen interest in this appeal. Within a matter of hours Vince Cable announced that the Department of Business, Innovation and Skills was setting up a taskforce to assess what the impact of the judgment will be on the UK economy and to explore ways of limiting the risk to business.

David Ward
Solicitor
Blacks Solicitors LLP
DWard@LawBlacks.com
0113 227 9262

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