Non-guaranteed Overtime Included In Holiday Pay

November 2014
Much publicity has been given to the recent decision by the Employment Appeal Tribunal (“EAT”) that paid overtime should be taken into account when calculating holiday pay.

The key points of the EAT decision.

The Working Time Directive requires workers to be paid “normal remuneration” during any period of holiday. Note that the term ‘holiday’ applies only to the basic four weeks’ leave granted under the Working Time Directive. Generally speaking, a worker’s “normal remuneration” is his or her typical average pay. Guaranteed overtime forms part of normal working hours and it has been accepted for some time that it should be included in the calculation of holiday pay. The significant change is that the EAT has now confirmed that non-guaranteed overtime should also be included. This is overtime that an employee regularly carries out but which an employer is not contractually obliged to provide. The key concern addressed by the ruling is that a worker should not be put at a financial disadvantage when taking holiday or deterred from doing so on account of financial disadvantage. This new development will enable a large number of workers who have been paid holiday pay representing their basic hours only to bring claims for unlawful deductions from wages, specifically, the difference between what they have been paid and what they should have been paid had holiday pay been calculated correctly.

It is not suggested that ad hoc overtime worked/paid infrequently should be included: the key as to whether the pay should be included in the holiday pay calculation is whether it occurs with enough frequency to be “normally included” as part of that worker’s pay. Salaried members of staff who only receive salary or those who also have the option of voluntary overtime are not affected by this ruling.

Retrospective claims for underpaid holiday.

Workers can bring claims for underpaid holiday pay going back in time, at most to the date when the Working Time Regulations 1998 came into force. Some media reports have suggested that this case will open the floodgates for employees to claim back-payments of holiday pay. However, the EAT has limited the impact of the decision by restricting how far employees can try to claim underpayments of holiday pay. The EAT confirmed that claims must be brought within three months of the last in the series of deductions. In practical terms, this restricts workers’ ability to bring retrospective claims for underpaid holiday.

The EAT has given leave to appeal the decision to the Court of Appeal, meaning that a final decision may not be received for quite some time.

The Simply-Docs contracts of employment will not be changed in the light of this ruling but we have made reference to the issues raised by this ruling on the Employment Contract Key Terms Information Page.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.

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