Earlier this year the European Court of Justice decided in Lock v British Gas that holiday pay calculations should include commission. But what about other payments in addition to basic pay like overtime? We consider the recent developments in this area.
Yesterday the Employment Appeal Tribunal (EAT) handed down its decision in the combined cases of Hertel (UK) Ltd v Woods, Bear Scotland Ltd v Fulton and Amec Group Ltd v Law. The EAT decided that holiday pay should factor in non-guaranteed overtime and the taxable elements of certain payments for travelling time (as opposed to expenses) as these are intrinsically linked to duties carried out under the individual's contract of employment.
Calculating holiday pay
The EAT followed the principles previously set out in the Supreme Court case of British Airways v Williams (2011) namely:
- any payments based on personal or professional status, for all activities whether basic or 'inconvenient' undertaken during employment, are included in the calculation of holiday pay
- any payments intended exclusively to cover occasional or ancillary costs arising at the time of performance are not included in the calculation of holiday pay
In two of the cases, the overtime being considered was non-guaranteed, that is although the employer was not obliged to offer overtime, once offered the employees were contractually obliged to accept it. On the evidence, the non-guaranteed overtime was offered with a sufficient degree of regularity for there to be a settled pattern of work and for the overtime payments to count as normal remuneration. Therefore, the intrinsic link between the payments and the work required to be carried out was therefore present.
This was also the case in relation to certain payments for travel time, since travel to various sites was part of the work the employees were required to undertake. Such payments could therefore be distinguished from pure reimbursement of expenses, and the taxable element of the payments should also be included in the holiday pay calculation.
What is not clear from the judgment, however, is whether these arguments apply equally to purely voluntary overtime which an employee is not contractually required to accept if it is offered. Whether such overtime is intrinsically linked to the required work is therefore likely to be a matter of fact in each case.
Again, it is not entirely clear what reference period is to be used in the calculation. The suggestion seems to be that employees should receive average weekly remuneration over a 12 week period.
However, in British Airways v Williams (which is a Supreme Court decision and therefore a higher authority) this left the question of the reference period up to the employer to reasonably determine. As a result, for those employers who have seasonal fluctuations in demand, meaning that allowances and additional payments to employees vary throughout the year, a 12-month reference period may be more appropriate and is therefore likely to be considered reasonable in the circumstances.
The EAT's decision only applies to holiday provided for by the European Working Time Directive, namely 20 days per year. The Government introduced an additional 8 days entitlement under the Working Time Regulations, and it appears that there are now two different calculations for holiday pay depending upon whether it is Directive holiday or Regulation holiday.
This is important in relation to the potential for backdated holiday pay claims. Such claims can be brought as an unlawful deduction of wages claim, on the basis that the failure to pay Directive holiday correctly would give rise to a series of deductions. Any such claim has to be brought within 3 months of the last deduction in the series. However, the EAT has suggested that a series cannot span a gap where holiday pay has been paid correctly. Therefore only claims brought within 3 months of the last day of Directive holiday are in time, since there is no error in the calculation of holiday pay for Regulation holiday.
The key question is therefore whether Directive holiday is taken first in any holiday year, followed by Regulation holiday which will then effectively break the series of deductions provided that there is more than a 3 month gap before the start of the next holiday year. Although the judgment is not entirely definitive on this point, the suggestion certainly seems to be that it is the first 4 weeks' leave in any holiday year to which the judgment applies (the extra 8 days under the Regulations being 'additional leave' and therefore, taken after Directive leave).
Suggested next steps
It is clear from the recent run of cases that employers are well advised to review the way in which they calculate holiday pay, where the hours and / or rates of pay are variable. Employers should consider how staff are paid and potentially consider changing the methodology for calculating holiday pay where particular payments or allowances are paid for activities required under the contract of employment.
From a purely practical perspective it might be that current payroll systems are not set up to be able to cope with a change in the way that holiday pay is calculated. The timescales for rolling out changes will therefore need to be considered alongside any necessary system upgrades.
There appears to be one certainty however; given that permission to appeal to the Court of Appeal has been granted in respect of these cases, the issue of how holiday pay is calculated is not going away any time soon. Although, when permission to appeal was granted it was on the basis that any appeal against the inclusion of regular non-guaranteed overtime within the calculation of Directive holiday pay did not have any reasonable prospects of succeeding.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.