Is overtime included in holiday pay?
You may have read or heard in the news early in November of a decision made by the Employment Appeals Tribunal (EAT) with the headline ‘overtime needs to be included in the calculation of holiday pay’. The decision is certainly an important one but, as is often the case, the headline does not necessarily reflect the complexities of the topic.
We are therefore writing to you to give our view of what issues you need to consider as an employer on this matter.
What Does Employment Law Require?
Under the Working Time Regulations 1998 (as amended) most workers are entitled to paid statutory annual leave. This is 5.6 weeks (28 days) if the employee works five days a week. Part time workers are entitled to the same holiday as their full time colleagues on a pro rata basis. This basic entitlement can include public holidays.
These regulations are derived from the EU Working Time Directive (which requires workers to be given four weeks annual leave).
A worker is entitled to be paid in respect of any period of annual leave for which they are entitled, at a rate of one week’s pay for each week’s leave.
The EU Working Time Directive is silent as to how to calculate ‘one week’s pay’ but the Employment Rights Act provides rules. These have been generally interpreted as only requiring ‘guaranteed’ overtime to be included in the pay calculation. Guaranteed overtime is overtime which the employer guarantees to provide to the employee even if the employer has no work available at the time.
How have court decisions affected the calculation of holiday pay?
There have been a number of cases heard before the Court of Justice of the European Union which have stated that workers should be entitled to their ‘normal remuneration’ when on holiday. Earlier this year the Court considered the case of a salesman whose remuneration consisted of basic salary and commission calculated by reference to sales achieved (typically 60% of salary).
The Court held there was an ‘intrinsic link’ between the commission payments and the tasks he was required to carry out under his contract of employment. Therefore commission was part of ‘normal remuneration’.
We now have three cases which have been heard together by the EAT. In these cases, employees were required to work overtime if requested by their employers. The EAT referred to this type of overtime as ‘non-guaranteed overtime’. The Tribunal considered two main issues:
- to what extent must non-guaranteed overtime be included in the calculation of holiday pay;
- for what period of time can workers seek to recover underpayments of holiday pay from employers.
Inclusion of overtime
Following the principles set out by the Court of Justice of the European Union, the EAT has decided in the context of non-guaranteed overtime:
- overtime payments must be taken into account in the calculation of holiday pay if there is a settled pattern of work;
- if the amount of overtime varies but is regularly paid, overtime payments must also be taken into account on the basis of an average taken over a ‘reference period’ (the reference period was not defined by the Tribunal but the 12 week period referred to in the Employment Rights Act may be an appropriate basis).
Workers seeking to make back claims
Generally a claim for underpaid wages needs to be made to an employment tribunal within three months of the underpayment.
The EAT has decided, in the context of underpaid holiday pay, that this general rule also applies to gaps between payment for holiday pay. So a worker who makes a claim in December in respect of underpaid holiday pay in April and September would not be able to claim for April as there is a gap of more than three months between the April and September underpayments.
Further points to note
- The judgement only applies to the amount of annual leave under the EU Working Time Directive (four weeks).
- The Tribunal has allowed the parties involved in the cases leave to appeal.
- The government has recognised the importance of the recent Tribunal decision and the Business Secretary, Vince Cable announced the setting up of a taskforce. This taskforce will discuss whether the business impact of the decision can be limited.
What should employers do?
As appeals may be made to the decisions, one could argue that nothing needs to be done at present. However, the Tribunal did note that any appeal against the principle of including non-guaranteed overtime payments in holiday pay is unlikely to succeed.
Therefore it would be prudent to:
- review the variable elements in employees’ pay and whether these are regularly paid. Overtime and commissions are two examples – there may be other amounts. The fundamental test is whether these sums are intrinsically linked to the tasks required to be performed by the employee.
- consider including these elements in holiday pay going forward. The additional payments do not have to be for the annual leave given in excess of the EU four weeks requirement.
- review employment contracts to see if they require amendment.
Some employers may wish to defer changing holiday pay calculations until the government’s taskforce has made an announcement of the impact of the decision.
For specific guidance, employers can contact a helpline provided by Acas:
Alternatively, please contact us if you require any further information or advice on 0113 2591666.