Should you include overtime payments in holiday pay?

The Employment Appeal Tribunal (EAT) has recently heard three important cases on the issue of whether non-guaranteed overtime should be included in holiday pay (Bear Scotland Ltd v Fulton, Hertel (UK) Ltd v Wood and Amec Group Ltd v Law).

Firstly, let me recap on the case law in this area:

In the case of Williams v British Airways Plc, the ECJ held that payments ‘intrinsically linked’ to the tasks that an employee carries out under his employment contract must be taken into account in calculating the appropriate rate of holiday pay. The ECJ then held in the case of Lock v British Gas Trading Ltd that commission should be included in holiday pay. Then various Tribunals held that voluntary overtime should be included in holiday pay (at least for the four weeks’ holiday guaranteed under the European Working Time Directive).

If the EAT supports the Tribunals’ approach in these Tribunal cases of reading additional words into the Working Time Regulations 1998 (WTR), then employers will be retrospectively bound by the amended legislation. It was argued in the EAT that to make employers liable even though they thought they were acting legally at the time would be a breach of the principle of legal certainty. Whether the EAT will accept that argument remains to be seen.

So how far back could liability go? The time limit for unlawful deductions claims is three months from the last in a series of deductions. The employee can then recover compensation right back to the first deduction in the series. Such deductions could therefore extend over a number of years, and potentially back to when the WTR were first introduced in 1998.

The EAT’s decision in these cases is not expected until October or November. Whatever the outcome, it is likely that there will be an appeal by the losing side.

So what should you do now?

Well, you could just wait for the decision to be published and decide what action needs to be taken then. There is currently no legal requirement for you to include overtime payments in your employees’ holiday pay.

Or, given the uncertainty about the limitation period for holiday pay claims, you may wish to consider implementing changes to your holiday pay calculations to include overtime payments now so that you are putting an end to the potential series of deductions. Unless an employee brings a claim within three months of the last payment of holiday pay, they will arguably be out of time to bring claims of unlawful deduction of wages for potentially many years of liability.

However, there are risks involved in this approach, not least the fact that the benefit of putting an end to the series of deductions will need to be weighed against the cost of including overtime payments in your employees’ holiday pay going forward; that a change to holiday pay calculations may simply highlight the issue of years of underpayment to employees; and the fact that it may be possible for employees to bring a breach of contract claim for holiday pay (which can go back 6 years).

There are also practical considerations:

What reference period should be used for the calculation of holiday pay? The Advocate General in Lock suggested a reference period of 12 months in relation to commission payments but this was not confirmed by the ECJ.

How do you determine which holidays are part of the four week entitlement guaranteed by the European Working Time Directive? Or will you just decide to include overtime and commission in all holiday payments anyway to avoid the administrative burden?

We may have the answer to some of these questions when the EAT publishes its decision (but don’t count on it!)

In the meantime, please feel free to contact me or any member of the team if you have any specific queries in relation to this issue.

If you found this blog relevant to you, you may be interested in our previous blog entitled “Holiday pay – Should commission be included?”