HM Insights

Holiday pay should include all overtime ... or should it?

The Employment Appeal Tribunal ("EAT") has issued judgment outlining that the calculation of holiday pay under the Working Time Directive must include compulsory overtime worked by the employee. It has been widely reported that this includes voluntary overtime, and it may be a reasonable supposition, but this is not what the judgment states. It should also be noted that this decision relates only to four weeks' holiday entitlement under the European Working Time Directive, not the full 5.6 weeks under the UK Working Time Regulations 1998. This has potentially significant further implications which could limit claims, discussed below.

Following (relatively) hot on the heels of this summer's landmark European Court of Justice case of Lock v British Gas Trading Ltd 2014 ("Lock"), in which it was held that statutory holiday pay should include payments in respect of certain types of commission, not only basic salary, the Employment Appeal Tribunal has now released judgment in the conjoined cases of Fulton v Bear Scotland Ltd 2013; Hertel (UK) Ltd; and Amec Group Ltd (collectively "Bear Scotland"), which further expand the parameters of what holiday pay should include.

Again, Bear Scotland, as with Lock, deals with the seemingly straightforward question of what an employer should take into consideration when calculating the holiday pay for its workers. The EAT has now confirmed that obligatory overtime has to form part of this calculation.

What kind of overtime?

However, the EAT seems to have left a significant degree of doubt as to whether "voluntary overtime", that is overtime where the employee has no contractual obligation to undertake the overtime offered by the employer and can legitimately choose to do the extra work or not, falls within the scope of the calculation of holiday pay for the purposes of European law.

The EAT held that the overtime considered in this case did not constitute voluntary overtime and expressly held only that non-guaranteed (but compulsory) overtime did fall within the scope of a week's pay. Therefore it would appear that the EAT's judgment did not – and should not - address the issue of purely voluntary overtime as it was not an issue before the court.

Where some confusion may arise is that there are passages within the judgment and submissions made on behalf of the employers regarding voluntary overtime, notwithstanding that the case did not strictly concern this matter. Those representing employees may claim that the Judge's rejection of the employer's submissions, including the aspects on voluntary overtime, represents a tacit acknowledgment that voluntary overtime should be included in the scope of holiday pay calculations. However, this was, arguably, not within the scope of the judgment and – whilst future litigation may indeed hold that voluntary overtime must be included in this calculation – there would appear to be no basis to state absolutely, as some commentators have, that voluntary overtime (which is probably the most common type of overtime) falls within the terms of this judgment. There is a lack of clarity, which will no doubt lead to further litigation.

Potential limitations to claims

Another issue the EAT addressed was whether a claim could be made using the unlawful deduction from wages legislation to capture lots of back-pay for underpaid holidays stretching back potentially years on end. It held that this could be done, but that such a claim must be made at the latest three months after the date of the deduction, or the last in a series of deductions. It was said that there is a potential limitation to claims for backdated holiday pay if an employee has not taken annual leave for a period of three months or, indeed, if an employer has correctly calculated and paid holiday pay for one or more days of annual leave, which would break the chain of deductions.

The application of this decision only to the four weeks' holiday entitlement derived from the Working Time Directive again offers some comfort to employers. This is because the judgment suggests that this is the entitlement that will be deemed to be used first by employees during a holiday year (in the absence of any contrary agreement), with the additional 1.6 weeks' entitlement under the Working Time Regulations used thereafter. As such, this, it is thought, will increase the likelihood that there has been a break in the chain of deductions and the employer will have correctly calculated the holiday pay entitlement for this additional 1.6 weeks' entitlement. Given the time of year this judgment has come out, with many employers having holiday years running from January – December and therefore many employees will have already used their Working Time Directive four weeks' holiday entitlement, it is possible that employers may face limited historic liability, but all will depend on when leave was taken.

Appeal, appeal, appeal

The judgment is therefore more nuanced than some had predicted and gives some scope for employers to avoid theoretically cumulatively large claims, but also some scope for further litigation, particularly in relation to the apparent exclusion of voluntary overtime from the terms of the judgment.

Leave to appeal on all the issues before the EAT was granted with the handing down of the judgment, meaning that all of the parties can appeal all matters to the Court of Appeal for further litigation.

With the case of Lock to be further heard in February next year relating to commission and associated payments, the correct calculation of holiday pay is an issue that will continue to need attention for the foreseeable future.

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Employers should act now to review their contracts, policies and any applicable workforce agreements and to be clear on what risks and choices exist as a result of this ruling.

We can assist with this. To discuss how this judgment affects your workplace, please contact one of our employment team.