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Overtime and holiday pay landmark ruling – key issues for employers

Posted by Lotty Reeves on 10th November 2014

Few will fail to have noticed the recent headlines regarding the Employment Appeal decision (Bear Scotland Ltd and others v Fulton and others UKEAT/0047/13) that even non-guaranteed overtime pay should count towards holiday pay. In the article below, Teesside’s Business Law Firm, Endeavour Partnership, unpicks some of the key aspects and implications of the decision. It is worth remembering however that the decision can be appealed and so it may be many more months before we have clarity.

1. Holiday entitlement – By way of background, employees in the UK are entitled to a minimum of 5.6 weeks (aka 28 days) paid holiday per annum (this includes bank holidays). Pro rata for part time employees.

2. This emanated from a European Directive which requires a minimum of 4 weeks (20 days), however the UK Government “gold plated” this right, granting employees here the additional 1.6 weeks paid holiday.

3. It is important to note that the Fulton decision applies only to the 4 weeks, rather than the additional 1.6 weeks. Further, if businesses are more generous, eg granting 25 days plus bank holidays, this ruling won’t apply to that extra holiday (although contractual terms should be examined in case an implied right is given to do so).

4. Normal pay – The decision means that, rather than employers being able to pay employees on holiday at their basic pay level, any overtime that is required to be worked regularly must be taken into account (for 4 weeks of their annual leave entitlement). Ad hoc, occasional overtime is not affected. There needs to be “a certain amount of regularity” for it to form “normal remuneration”. It also appears to rule out voluntary overtime (even if this is worked regularly; the emphasis appears to be on overtime “required” by the employer, ie a compulsory element to it). However, it is by no means clear that an argument put forward by an employee that regular and consistent voluntary overtime should not be captured in holiday pay.

5. Reference Period? – There is a lack of clarity on how a business is supposed to assess the earnings of an employee who works flexible hours, in order to establish how much holiday pay is due for any given period of annual leave. For example, a retail outlet may require high levels of overtime in the period October to Christmas. If the reference period is 12 weeks (as in other areas of employment legislation) then clearly there will be an opportunity for a savvy employee to ask for holiday immediately after this…..How far an employer can exercise its right under the Working Time Regulations to postpone the employee’s holiday remains to be seen.

6. Backdating – this decision offered some comfort to businesses by significantly limiting the ability for employees to claim potentially years of backdated holiday pay. Claims must be made within three months of the deduction (or the last in a series of deductions). The Judge’s ruling indicates that if there is a gap of over three months between underpayments of holiday pay then that would break the chain of deductions and claims would be out of time. However, he used some novel and untested reasoning to reach this conclusion and he indicated that this could form the basis of an appeal to the Court of Appeal as it was “arguable”.

7. Workers can submit tribunal claims for any holiday pay paid in the last 3 months that failed to include guaranteed and non-guaranteed overtime. These claims can also go beyond the preceding three months to include previous holiday payments provided that the gap between each holiday payment does not exceed 3 months.

8. What next for employers? – It would certainly be prudent for businesses affected by this ruling to review their overtime provisions and if regular overtime is necessary, to include this in holiday pay from now on. This will then draw a line in the sand in terms of a series of claims (providing an employee hasn’t recently taken holiday and lodges a claim in the meantime). Additionally voluntary overtime should be monitored in case in the future it is decided voluntary overtime is to be included into holiday pay entitlement also.

9. We take the view that the decision is likely to be upheld, and the biggest danger is that the Court of Appeal reviews the “backdating” restriction. That being said, we await Vince Cable’s “taskforce” review of the implications of the decision with interest.

Disclaimer

This article is © Endeavour Partnership LLP 2014 and may not be reproduced without our express permission.

This article is a general summary and should not be relied upon in the place of seeking professional advice in respect of any specific situation.

No responsibility can be accepted for any actions based on the information in this article.

 


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