HOLIDAY PAY BASED ON OVERTIME
David Gray-Jones Saturday, November 1, 2014
There has been extensive coverage in the media of the judgment of the Employment Appeal Tribunal which has held that under the Working Time Regulations 1998 workers were entitled to holiday pay based on their normal pay, including any overtime (Bear Scotland Limited and others v Fulton and Hertel (UK) Ltd and Amec Group Ltd v Woods and Law UKEATS/004713, UKEAT/0160/14, UKEAT/0161/14). The effect of the judgment is that employees are now entitled to receive holiday pay based on all the hours they work during the year, including overtime. Until now only basic pay has counted towards the holiday entitlement under the Working Time Regulations.
The Background to the Judgment
The origins of the judgment lie in the European Working Time Directive. This places an obligation on countries in the EU to enact legislation which regulates working time. Such legislation should include limits on the time which workers can work and provide for a minimum entitlement to paid holiday. This entitlement currently stands at 28 days per week. The Working Time Directive was implemented in the UK by the Working Time Regulations 1998. This legislation covers all UK workers and gives them a minimum paid holiday entitlement of 28 days per annum. The formula for calculating holiday pay, which was set out in another piece of domestic legislation, the Employment Rights Act 1996, appears to make clear that only basic pay counted towards the calculation of pay during holidays, and in 2003 the Court of Appeal confirmed that this was the correct position.
In 2006 over 2000 pilots employed by British Airways brought claims alleging that British Airways had not paid them their entitlement to holiday pay. The pilots were not covered by the Working Time Directive or the Working Time Regulations but by the Aviation Directive and the Civil Aviation (Working Time) Regulations. The claim went all the to the European Court of Justice which ruled that holiday pay for pilots should be based not only on their basic pay but should include additional payments to reflect the bonuses and allowances they received when flying. Although the case did not directly concern the application of the Working Time Regulations it seemed clear from the judgment of the European Court of Justice that the Working Time Directive and consequently the UK Working Time Regulations should be interpreted in the same way. This was reinforced by a further judgment of the European Court of Justice in the case of Lock v British Gas which held that where an employee's salary consisted of both basic pay and commission the holiday entitlement should include an element to reflect the commission that the employee would have received had he not been on holiday. The European Court of Justice made clear that national governments must ensure that, "all components of total remuneration relating to the professional and personal status of the worker must continue to be paid during his paid annual leave."
The judgment of the Employment Appeal Tribunal was concerned with overtime. It held, in the light of the judgments of the European Court of Justice, that the Working Time Regulations 1998 must be interpreted in a way that provided that where overtime is worked by an employee it must be reflected in their holiday pay, and it would not be lawful to pay holiday pay calculated solely on basic pay. The judgment is clear that this includes overtime which the employer is not obliged to offer but the employee must work if required. It is not entirely clear if it includes overtime which the employee is not obliged to work if offered, although in the light of the European Court judgments it is likely that this overtime should also count towards holiday pay entitlement.
How Much Can Employees Claim?
If an employee does not receive holiday pay based on their total earnings, including earnings for overtime, then they can make a claim against the employer under the Working Time Regulations. The claim can also be made as a claim for unlawful deductions from pay. The claim would be for the difference between the holiday pay received and the holiday pay which should have been paid, based on the overtime which the employee had worked.
How Far Back can Claims Go?
Before the judgment of the Employment Appeal Tribunal it was thought that it might be possible for an employee to make a claim for backdated holiday pay going back to the start of their employment, although no claim could go back further than the introduction of the Working Time Regulations in 1998. This is because a claim for unlawful deductions can be based on a series of deductions, provided there is sufficient linkage between the individual deductions. However, the Employment Appeal Tribunal has held that a deduction will only be part of a series of deductions for the purposes of this type of claim if there is less than three months between the deduction of holiday pay and any previous deduction. This is likely to be significant obstacle to many employees who try to bring claims for holiday pay arrears based on more than a short period.
Furthermore the judgment suggests that overtime should only be included in the first 20 days of holiday, this being the minimum entitlement under the Working Time Directive, and the additional 8 days granted in the UK under the Working Time Regulations does not need to include overtime in its calculation. The judgment appears to suggest that the employee should take the first 20 days of leave first and then the further 8 days due under the Regulations after this. This may cause problems for employers in calculating the correct rate of holiday pay but may also cause problems for employees because of the need for holidays to be linked by a period of no more than three months if they are to be claimed as a series of deductions.
What Happens Now?
The Employment Appeal Tribunal has given permission to appeal against its judgment to the Court of Appeal. Because the stakes are so high appeals are likely, both from the employers, who will seek to argue that holiday pay should only be calculated on basic pay, and the employees, who will argue that the Employment Appeal Tribunal was wrong to limit claims based on a series of deductions to those where less than three months has elapsed between the holiday periods which form part of the series of alleged deductions. There is a further right of appeal from the Court of Appeal to the Supreme Court, and the Court of Appeal or the Supreme Court could refer the matter to the European Court of Justice (which was what the government was arguing should have been done by the Employment Appeal Tribunal). Therefore the final position may not be known for a number of years. Meanwhile the government has announced it is setting up a taskforce to examine the impact of the ruling.
Despite the fact that the final position may not be clear for some time there is a significant likelihood that the Court of Appeal and Supreme Court will uphold the Employment Appeal Tribunal's judgment. Businesses should therefore be making plans to address the impact of the judgment. This will involve assessing the compliance of their current holiday pay arrangements, and what steps they might have to take to address any potential underpayments to employees and limit the risk of claims.