There has been a lot of press following the recent case of Bear Scotland Ltd v Fulton and another UKEATS/0047/13, Hertel (UK) Ltd v Woods and others UKEAT/0160/14 and Amec Group Ltd v Law and others UKEAT/0161/14.  The Employment Appeal Tribunal (EAT) has held that non-guaranteed overtime should be taken in to account when calculating Holiday Pay.

2014 has been the year of clarifying the holiday pay calculation.  There has been an array of cases brought at Tribunal, Employment Appeal, High Court and European Court of Justice level,  all seeking to define the boundaries/formula to be used when calculating holiday pay.

Two opposing views:

In one camp, cases brought by employees (often backed by unions as class actions) have sought to argue that holiday pay should include not only basic pay but also commissions which are linked to pay - overtime guaranteed and non-guaranteed i.e. a formula that reflects actual take home remuneration.

This faction has argued that holiday is a legal requirement (set out in the Working Time Directive) and, as such, when staff take this legally enforced leave they should continue to receive remuneration at the same scale as if they were working during this period. They maintain that. Although staff are not there to work extra shifts or sell and receive commissions, these payments should still be included in the calculation of holiday pay.

The alternative argument, generally maintained by the employers, is that holiday pay should only include basic rate of pay as overtime is not worked and extra commissions not earned during any period of leave.

The legal confusion

The EU Working Time Directive (2003/88/EC) (the Directive) provides that member states must ensure that workers have the right to paid annual leave of at least four weeks per year. This right was implemented in the UK via the Working Time Regulations 1998 (WTR).

The Directive did not specify how pay for holiday leave should be determined. The WTR states that workers should be paid a “week’s pay” for each week of leave calculated in accordance with the Employment Rights Act 1996 (ERA).

The position is confusing and has enabled employers to calculate EU statutory holiday pay based on basic pay only, excluding other payments such as commission and overtime.

Surprisingly, there had been little litigation regarding the calculation of holiday pay until recently. A number of cases have been brought, supported by unions seeking a formula resulting in increased pay for a lot of their members and also hoping for a result which would mean employees being able to reclaim several years of underpaid holiday pay.

Recent cases:

The turning tide of case law:

Commission

In Lock v British Gas Trading Ltd [2014] IRLR 648, the ECJ stated that EU statutory holiday should include commission as it was intrinsically linked to the work done and formed part of “normal remuneration”.

Guaranteed Overtime

In the 2011 case of Williams v British Airways Plc [2011] IRLR 948, the European Court of Justice (ECJ) determined that the Directive requires workers to receive their “normal remuneration” for EU statutory holiday pay. The ECJ said this includes payments “intrinsically linked” to the performance of tasks which workers are required to carry out under their contract of employment.

In April 2014, the case of Neal v Freightliner Ltd ET/1315342/12 was decided in which an employment judge held that, in the light of Williams, a worker's overtime payments had to be taken into account when calculating his holiday pay.

In Wood and others v Hertel (UK) Ltd and another ET/2603803/12, the tribunal held that "compulsory" overtime (where the worker must work overtime if required to do so by the employer) must be included, by virtue of the ECJ's decision in Williams. It also found that incentive bonus arrangements should be included.

Non-Guaranteed Overtime

Despite the expanding definition of holiday pay, it was not known how the most recent case, decided on 4 November 2014, would turn out.  The Claimants sought to argue that holiday pay should include not only guaranteed overtime but also non-guaranteed.

In the case of Fulton and another v Bear Scotland Ltd ETS/4112472/12, the EAT held that workers who worked regular overtime (that they could refuse on reasonable grounds) were, as a matter of course, entitled to have that overtime reflected in holiday pay. Further, standby and emergency call out duties had to be taken into account. The tribunal decided that the workers should be regarded as having no normal working hours, despite the fact that their contracts guaranteed a set number of hours.

The EAT's decision clarifies that "non-guaranteed" overtime should also be included. However, what is the position regarding purely voluntary overtime where there is no obligation on either side? This is likely to be the most common form of overtime in the majority of sectors. The EAT did not reach any definitive conclusion but it is possible that tribunals will interpret voluntary overtime as forming part of normal remuneration if a settled pattern has developed over a sufficient period of time to justify the label of "normal" pay.

Practical impact

In reality it is thought that the most recent decision will now require employers to look back over the past 12 weeks of the hours and remuneration received by staff, to try to establish the average amount of work and income in which to calculate holiday pay.

Limiting Historic claims:

Although the unions are delighted with the decisions which, in effect, mean a pay rise for a lot of workers, it is interesting that the Judiciary has sought to balance this with the potentially damning financial consequences that could have arisen if employees were able to look back and reclaim years of incorrectly calculated holiday pay.

The Judge overseeing this case indicated that it would be unduly harsh to allow employees to recover historic pay when employers were interpreting the law as they understood it at the time.  The EAT has clarified that an employee could claim the resulting underpayments in their holiday pay as unlawful deductions from wages if they bring a claim in the Employment Tribunal within 3 months of a deduction or are able to link the deduction to a series of deductions, the last of which being within 3 months of bringing a claim.