Recent case law on overtime and holiday pay has caused some concern for SMEs, particularly those in industry and manufacturing where overtime is frequently used, so we thought we would speak to the professionals and contacted Aye Limbin Glassey, Partner at Shakespeare Martineau to ask if she could provide guidance on some of our key questions. To our delight she agreed – so a very big thank you to our Guest Blogger this month Aye Limbin Glassey for providing very detailed and insightful answers to our key questions. So what’s it all about…..?
In the conjoined cases of Fulton v Bear Scotland Ltd, Wood v Hertel (UK) Ltd and Law and others v Amec Group Ltd, the Employment Appeal Tribunal (EAT) confirmed that non–guaranteed overtime, which is overtime that a worker is obliged to work if offered by the employer, should be included when calculating a worker’s holiday pay. The ruling has widespread implications for all organisations that pay overtime to staff.
Does that mean we have to include all overtime in holiday pay calculations?
Whether overtime should be included depends on the type of overtime. The Bear Scotland decision refers to non-guaranteed overtime, which should be included. It has previously been established that guaranteed overtime (i.e. where the employer is liable to pay for it event if the workers is not called on to work it) forms part of the normal working hours and should be taken into account.
What about voluntary overtime?
Voluntary overtime is where an employee cannot be required to work it, and the employer does not have to provide it. The position here is not clear and employers should consider what is best for their business.
Many employers will feel that including voluntary overtime in the calculation of holiday pay is a step too far, particularly as employees might only choose to work overtime in the run up to a holiday period. Some employers will prefer to start including voluntary overtime now to encourage a happy workforce and to spread the potential cost of possible guidance in favour of workers in the future.
Whatever decision an employer reaches, it will be important to maintain employee and union relations by, for example, consulting with them about handling voluntary overtime going forward.
Does this apply to all of a worker’s holiday?
No. EU law gives workers a right to 4 weeks’ (20 days) leave per year, with UK law giving workers the right to anadditional 1.6 weeks’ leave. Non–guaranteed overtime only needs to be taken into account when calculating holiday pay for the 4 weeks given to workers under EU law. The ruling also does not apply to any contractual holiday entitlement above the statutory minimum.
So how should we calculate holiday pay then?
Where the pattern of work is settled there should be no difficulty in identifying what normal pay is. For example, if the worker usually works an extra 5 hours per week, then the calculation will be straightforward.
If the worker works variable amounts of overtime from week to week, then the employer should calculate holiday pay by taking an average amount of a week’s pay over a reference period. The EAT did not specify what the reference period should be. Some commentators believe that a 12 week period is appropriate, whereas others suggest that a 12 month period would give a more accurate picture.
It would be good practice for an employer to decide on an appropriate reference period that gives a fair reflection of the overtime pattern and to apply that method of calculation consistently to all workers.
What if we don’t include non-guaranteed overtime?
A worker could bring a claim for unlawful deductions from wages within three months of the last in the series of deductions. In Bear Scotland, the EAT stated that claims for arrears of holiday pay will be out of time if there hasbeen a break of more than three months between successive underpayments.
SMEs can take some comfort from the fact that, for claims lodged on or after 1 July 2015, workers will only be able to backdate a holiday pay claim for two years. Nevertheless, where a worker who frequently works non-guaranteed overtime has a claim going back two years, and there has been no three month break between underpayments, the amount of holiday pay due could be substantial.
Can we do anything to avoid the risk?
An employer that wants to minimise the risk of retrospective claims (and protect against future claims) will need to consider ending the series of deductions by starting to include non-guaranteed overtime in holiday pay, and continuing to do so.
There are other things an employer can do to limit the impact of the judgment. An employer can determine when a worker takes holiday. The employer could therefore count the 4 weeks’ leave as the first 20 days in the holiday year if it is likely that more overtime will be worked later in the year, or vice versa. The employer could also stagger overtime so that there is no regular pattern of work.
Surely we don’t have to include commission too?
Yes. The ECJ ruled in Lock v British Gas Trading Ltd that commission must be included in holiday pay calculations. Mr Lock was not able to generate any commission during his holiday which led to a financial disadvantage. The ECJ ruled that his holiday pay must include an element to offset this disadvantage. The calculation is left up to national courts to determine and must be based on average commission earned “over a reference period which is considered to be representative”. We await guidance from the tribunal in Lock on the appropriate reference period.
Aye Limbin Glassey
Partner
Chancery House, 199 Silbury Boulevard, Milton Keynes, MK9 1JL
