Taking The Pain Out Of Holiday Headaches

Holiday pay hit the news headlines last year following a significant decision of the Employment Appeal Tribunal as to whether extra pay for working overtime should be included in holiday pay calculations. 

In the combined case of Bear Scotland Ltd v Fulton & others, the EAT was asked to determine what constitutes ‘normal remuneration’ for holiday pay purposes, and more specifically, whether non-guaranteed overtime and other allowances have to be included in determining holiday pay.  Now that the dust has settled, Nicola Butterworth, Associate Solicitor at Howes Percival LLP, explores the potential implications of this decision for businesses and considers what they should be doing now?

What is the issue with holiday pay?

The EAT’s decision, followed the earlier decisions of the Court of Justice of the European Union including British Airways v Williams and Lock v British Gas, which clarified that during paid leave, workers are entitled to receive any remuneration that is intrinsically linked to the performance of the tasks that they are required to carry out under their contract of employment for which a monetary amount is provided.  These cases established that holiday pay calculations should include certain additional payments, such as commission, provided that they constituted ‘normal remuneration’.  The consequence of these decisions is that businesses could face claims from workers for failure to pay such amounts.

What is ‘normal remuneration’?

The EAT confirmed that holiday pay must correspond to normal remuneration, which is that which is normally received by a worker.

Can overtime pay constitute ‘normal remuneration’ for holiday purposes?

Yes. It has been established for some time that guaranteed overtime pay must be taken into account when calculating holiday pay.  In the case of Bear Scotland, the EAT distinguished ‘non-guaranteed overtime’ (overtime that the employer does not guarantee to provide, but which an employee, if requested, is obliged to perform) from guaranteed overtime and voluntary overtime. The EAT confirmed that pay for ‘non-guaranteed overtime’ should also be included in the calculation of holiday pay in certain circumstances, but only for 4 weeks’ of a full-time worker’s total 5.6 weeks’ holiday pay entitlement each year (pro-rated for part-time workers).  Unfortunately, no guidance was provided by the EAT as to the mechanism that businesses should use to calculate holiday pay to include non-guaranteed overtime pay.  The EAT did not specifically deal with overtime that is entirely voluntary, but it is anticipated that, in time, case-law will determine that voluntary overtime that forms part of a worker’s normal remuneration should also be included in holiday pay.

What are the implications of this decision for businesses?

The main impact for businesses is the potential risk of their workers raising claims for underpayment of holiday pay.  While the EAT and new legislation (introduced earlier this month) has limited the scope for workers to recover underpayment of holiday pay by way of an unlawful deductions from wages claim, the requirement for business to include non-guaranteed overtime pay in holiday pay could mean an increase in their overall wage bill.  For those businesses that traditionally use overtime to manage fluctuations in demand for their goods and services, this decision could have significant financial implications. 

What should businesses be doing now?

Businesses should consider the impact of this decision and assess the potential liabilities that they face.  Dependent on the holiday pay arrangements they currently have in place, businesses may decide to take action now to prevent claims for historic underpayment of holiday pay and to ensure that they are properly protected going forward.  Subject to any future legal developments, the EAT decision is clear that businesses are legally obliged to ensure that all guaranteed overtime pay and, in certain circumstances, non-guaranteed overtime pay should be included in holiday pay calculations.

Howes Percival LLP is sponsoring and hosting the March 2015 Norfolk Chamber of Commerce HR Forum, which will focus on the impact of recent case-law decisions on the calculation of holiday and provide strategic advice for HR professionals tasked with handling this difficult issue, as well as guiding them through the new right to shared parental leave and the implementation of this regime in practice.

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