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Over and Over Again: The Recent Ruling on Overtime and Holiday Pay

On 4 November 2014, the Employment Appeal Tribunal (EAT) handed down its judgment in respect of three conjoined cases concerning the calculation of holiday pay, and in particular whether a failure to include overtime in calculating holiday pay was an unlawful deduction of wages.  Ultimately the EAT determined that workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments.  

The Working Time Regulations (the WTR) provide that workers are entitled to 5.6 weeks’ statutory annual leave (inclusive of public holidays), and that such leave is to be paid at the rate of a week’s pay for each week’s leave.  Generally, a week’s pay will be calculated with reference to an employee’s normal working hours, or if they do not have normal working hours (for example by being on a zero hours contract or having variable shifts) the calculation will be made based on the worker’s average weekly remuneration calculated over the preceding 12 weeks.  In the latter example, overtime and commission would be expressly included in the calculation.

Previous cases had confirmed that where there were normal contractual hours of work but overtime or additional hours may be worked (i.e. they were not obligatory or guaranteed), statutory holiday pay would be calculated with reference to the fixed contractual hours only.  The issue before the EAT was whether such a position was in accordance with the Working Time Directive (the European directive implemented in the UK by the WTR) (the WTD).

The EAT determined that non-guaranteed overtime must be paid during annual leave.  The next question for the EAT was then whether the employer had made a series of unlawful deductions in respect of several years’ the non-payment of the overtime element of the employees’ holiday pay. In normal circumstances, an employee is entitled under the Employment Rights Act 1996 to bring a claim within the relevant limitation period following the final deduction in a series of deductions, and claim for the full sums even if some of those deductions would otherwise fall outside of the limitation period. 

However, the EAT ruled that a claim that seeks to include previous deductions in respect of overtime in annual leave payments will be out of time if there has been a break of more than three months between successive underpayments.  As this will relate to the 20 days’ holiday required by the WTR, and such days are deemed to be taken first in any holiday year, anyone who has taken 20 days’ leave before the date three months before the end of their holiday year will be unable to bring a claim in respect of such deductions.  This is likely to significantly reduce the number of historical claims being made, and thankfully for employers significantly reduces the potential backdated overtime bill.

The EAT also determined that payments in lieu of notice, where an employee’s employment is terminated with immediate effect, should be calculated on the same basis as holiday pay and therefore include an element in respect of non-guaranteed overtime.

The EAT further held that payments in respect of travel time which exceed expenses incurred (and therefore would be considered by HMRC as additional taxable remuneration) should also be part of the calculation when making annual leave payments.

Whilst the EAT has granted permission for all of its determinations in this case to be appealed to the Court of Appeal, it has pointed out that such an appeal in respect of its general determination on overtime being included in holiday pay is unlikely to be successful.  The main issue for the appeal, in the EAT’s mind at least, will be the preclusion on backdated claims beyond three months. 

So what does this all mean for employers? Well, given that the matter is being appealed employers do not yet need to be nervous about receiving a flood of claims regarding backdated overtime pay. However, it is clear that the general principle regarding overtime forming part of the calculation of holiday pay is likely to remain in place, and employers should therefore consider whether they need to update their policies or contracts.

There remains some uncertainty as to whether voluntary overtime should also be included in the calculation of holiday pay.  The implication certainly seems to be that if it is paid on a reasonably regular basis, then employers would be well advised to include it.  A 12 week reference period is generally advised but there are no specific guidelines in place.

The government has set up a task force to consider the implications of the EAT’s decision and this may result in new or amended legislation being proposed to clarify matters for employers. 


This article was first published as part of our Employment Law Update - November 2014. Register above to receive our updates as soon as they are published, directly to your inbox!

This article is offered for general informational purposes only, and does not constitute legal advice. The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the views or opinions of Solomon Taylor & Shaw.