Holiday and overtime payments

In a landmark decision, the Employment Appeal Tribunal decided earlier this month that holiday pay should include "non-guaranteed" overtime that is normally worked.  This decision has attracted widespread interest, both in the mainstream media and amongst HR professionals.  Now that the dust is settling on the EAT's decision, Sarah Lamont looks at the issues that are emerging, and considers the options available to employers. 

The background

In Bear Scotland Ltd v Fulton, the Employment Appeal Tribunal (EAT) looked at whether our domestic legislation – specifically, the Working Time Regulations (WTR 1998) and the provisions for calculating a "week's pay" in the Employment Rights Act 1996 (ERA 1996) – correctly applied the requirements of the Working Time Directive ('the Directive'). The EAT also looked at how far claims for underpaid holiday can be backdated.

The Directive requires that workers are allowed 4 weeks' paid leave per year, and our domestic legislation, the WTR 1998, requires that workers' are allowed a further 1.6 weeks leave. So, in the UK, the entitlement is for a total of 5.6 weeks' annual leave.
Workers must be paid at the rate of a "week's pay" for each week's leave, calculated in accordance with a complicated regime contained in sections 221 to 224 of the ERA 1996. Different calculations are required, depending on worker's working pattern, as follows.

WORKING HOURS	HOW PAY IS CALCULATED
Normal working hours	"Week's pay" is calculated with reference to hours worked.
No normal working hours	Average weekly pay (including overtime pay, bonuses and commission) calculated over a 12-week reference period.

Under UK legislation and case law, the treatment of holiday pay for overtime where a worker has normal working hours is determined by the type of overtime worked, and, prior to the decision in Bear Scotland Ltd v Fulton, was as set out below.

TYPE OF OVERTIME	INCLUDED IN HOLIDAY PAY?
Guaranteed and compulsory (employee must work if required and employer must pay even if not worked by employee).	Yes
Non-guaranteed (employee must work if required but employer under no obligation to provide, or pay if not worked – not to be confused with voluntary overtime).	No
Voluntary	No

A worker who considers that they have not received a week's pay for each week of leave can bring a claim under the WTR within three months of the date when the payment fell due, and the time limit will start to run from the last in "a series of deductions" (section 23(3), ERA 1996).  As each underpayment may form part of a "series", there is potential for underpaid holiday payments to be backdated for many years. 

In Bear Scotland Ltd v Fulton, the workers in question asked the EAT to consider whether the following should be included in their holiday pay:

• non-guaranteed overtime; and
• travel time / 'radius' allowances.  

The decision

Non-guaranteed overtime

The EAT said that holiday pay should include payments for non-guaranteed overtime (ie overtime which a worker is required to work but which the employer is not obliged to provide) which is normally worked, because workers are entitled to their "normal remuneration" whilst taking holiday.

The EAT felt that the issues were fairly clear-cut and decided:

• "normal" pay is pay which is normally received;
• payment has to be made for a sufficient period of time to qualify as "normal";
• in cases such as this, where the pattern of work was settled, it is not difficult to identify normal remuneration; and
• where there is no such normal remuneration, it is appropriate to use an average taken over a reference period.

It is important to note, however, that the approach set out above only applies to the 4 weeks annual leave to which workers are entitled under the Working Time Directive; the EAT's decision does not apply to the additional 1.6 weeks' leave afforded to workers under UK law – for this leave, the previous approach (see 'background' above) still applies. 

Radius and travelling time allowances

The EAT also held that radius and travel time allowances are part of "normal remuneration".  The radius allowance was paid by Hertel and AMEC to any employee who travelled daily between their home and a site over eight miles away and was for travelling time and fares. The travelling time payment entitled employees to be repaid for time spent travelling. In the EAT's view, time spent travelling is not an expense ancillary to travel (such as a train ticket or bus fare would be) and it is not a cost. The radius and travelling time allowances were not paid purely because of where the workers lived. Rather, they were payment for time spent by the worker travelling to a number of sites, as is common in the construction industry. As such, the taxable element of these allowances formed part of the worker's normal remuneration.

Backdating of claims

Although the EAT's decision on overtime payments was bad news for employers, the blow was softened by its decision on the backdating of overtime claims. Unexpectedly, the EAT said that workers will be out of time to bring claims for underpayments in their holiday pay where more than three months has passed between each underpayment. 

What does this mean for me?

At first sight, this decision provides clarity: compulsory overtime which employees normally work should be included in holiday pay; but, some uncertainties still remain...

Both parties have been given leave to appeal against this decision and it is fully expected that appeals will be lodged. The EAT particularly noted that its decision on the backdating of claims was "arguable" and of public importance, and our view is that this aspect of the decision is most vulnerable to being reversed by the Court of Appeal. Therefore, the position is unlikely to be finally settled until appeals have been heard and, possibly, considered by the European courts. So, it seems that this case is one chapter in a story which is far from over. 

There are also several questions which remain unanswered as a result of the Bear Scotland decision. 

• How should employers deal with other payments and allowances, such as anti-social hours payments or enhanced rates for working bank holidays?
• What is the position in relation to voluntary overtime? The EAT did not provide a definitive view on this question, as their decision focussed on overtime which an employee is required to work. It is possible that where voluntary overtime is worked on a regular basis it could be viewed as "normal remuneration" but that has not been expressly determined.
• What is the appropriate reference period to calculate holiday pay where there are no normal working hours? 12 weeks was suggested by the EAT, but this may not be appropriate for all employers and the EAT's view is not definitive.

What options are available to employers at this stage?  It would be prudent to undertake a review of your potential exposure in relation to overtime and allowances. You can then decide whether you want to make changes now (and thereby start the 3 month time limit running for claims); or sit tight and wait until there is greater certainty about the position.