Overtime and Holiday Pay

Bear Scotland v Fulton in practice – What it means for employers

Yesterday saw an awful lot of panicked (and inaccurate) reporting of the Employment Appeal Tribunal (EAT) decision in the case of Bear Scotland v Fulton, which affirmed that compulsory overtime payments must be included when calculating holiday pay.  Whilst many of the updates and news articles definitely caught the public’s attention, they gave employers only the headlines and in many instances created a false impression of the impact that the judgment is likely to have.  Some were just plain wrong!

We have taken the time to review the judgment, consider the facts and analyse the practical impact.  Having done so, we believe that whilst the decision will require some changes to the way in which holiday pay is calculated, for many employers thepotential liability is not as dramatic as the reports yesterday were suggesting.

The law

Under the Working Time Directive (2003/88/EC) (the ‘Directive’) workers have the right to take and be paid for minimum periods of annual leave. The Directive was introduced into UK law by the Working Time Regulations 1998 (the ‘Regulations’).

Under the Regulations, workers have the right to be paid at the rate of a week’s pay during their statutory holiday. The Employment Rights Act 1996 (the ‘Act’) states that for workers with normal working hours, a week’s pay will only be the amount to which they are entitled under their contract. Therefore, under the Act any payments for non-compulsory overtime made within the 12 week reference period for the purpose of calculating holiday pay did not appear to have to be included in a worker’s rate of holiday pay.

The potential claims

A worker who has not received the correct amount of holiday pay is entitled to bring either a claim for a breach of the Regulations (which must be brought within three months of the underpayment) or a claim for unlawful deduction from wages (which must be brought within three months of the deduction or the last in a series of deductions).

The EAT’s decision

The EAT held that under the Directive, workers should, in fact, receive their ‘normal pay’ when taking their statutory annual leave, and not just their basic salary. ‘Normal pay’ includes pay which is intrinsically linked to tasks which the worker is required to carry out.  Therefore, if a worker is required to work overtime such payments should be included within an employee’s ‘normal pay’ and thus taken into account when calculating holiday pay.

However, the EAT made a key distinction between overtime which the worker is required to work if the employer requests it (but which the employer is not required to offer), “non-guaranteed overtime” and “voluntary overtime” which the worker is free to refuse if the employer offers it. Importantly, the EAT’s judgement relates only to non-guaranteed overtime and not voluntary overtime.   So, if the worker is contractually (whether expressly or implicitly) required to perform overtime if asked to do so, they are entitled to have that overtime included in their holiday pay.  However, if they have the right to refuse overtime (i.e. it is a perk and not an obligation) then that overtime pay is not included for the purpose of calculating holiday pay.

Exposure to claims

The EAT also considered how extensive an employer’s liability may be by considering the period in respect of which an employee can actually bring claim for unpaid holiday.  Helpfully for employers, the EAT held that where there is a gap of 3 months or more between underpayments any ‘series’ of unlawful deductions will be broken – meaning that potential claims in respect of earlier underpayments will fall away.

Further, it found that the right to holiday pay in this context applies only to statutory holiday under Regulation 13 of the Working Time Regulations (20 days) as opposed to the additional 8 days granted by Regulations 13A – also indicating that a workers statutory holiday will be deemed to be taken before any additional contractual holiday entitlement.  Consequently employers need only include relevant overtime in their calculations in respect of 20 statutory holiday.  For workers with enhanced contractual holiday it is likely that towards the end of any holiday year they will be using up their additional and not statutory entitlement, meaning that the risk of claims is again reduced as the 3 month deadline clock ticks.

Practical implications

Whilst the decision was cited as a major ‘game changer’, the judgment is, in fact, limited in its impact.  The cases’s application to only ‘non guaranteed overtime’ means that the decision will not bind employers where workers are free to refuse overtime, who can therefore retain the status quo in relation to their calculations.  That said, clearly cases on this may follow.

Further, even where ‘non guaranteed overtime’ is worked, it is unlikely that an employer’s liability will be far reaching. Unless workers space their holiday out very regularly throughout the year they are unlikely to have accrued a particularly long ‘series’ of deductions in respect of which claims may be made given the 3 month break point.

Recommendations

Employers concerned about potential liability should undertake an assessment of the workforce to determine which workers have taken part of their statutory holiday entitlement within the past 3 months and would therefore be in a position to bring claims in the Employment Tribunal.

If a worker has taken statutory holiday within the past 3 months (and is someone who must undertake overtime if requested), employers may wish to consider re-calculating the holiday pay to which the worker is entitled, and consider paying the worker the additional sums due.  In this way, historic liability will have been satisfied and any series of deductions will be broken.

It is worthy of note that right to appeal against the EAT’s decision in Bear Scotland v Fulton has been granted. Therefore, the law on this point may change.   However, until then employers with a workforce that must undertake overtime if requested should consider including overtime pay in the calculations for holiday pay to minimise the risk of future liability.

If you would like further information on this judgment and the impact on your business please speak with your usual Magrath contact.