04.11.14 EAT Rules to Include Overtime when Calculating Holiday Pay

In three recent Employment Tribunal cases (Fulton v Bear Scotland Ltd, Wood v Hertel (UK) Ltd and Neil v Freightliner Ltd), the question of whether overtime should be taken into account when calculating holiday pay entitlement was considered. All three cases held that voluntary and compulsory overtime should be included in the calculation on the basis that the overtime was “linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment.” All three employers appealed to the Employment Appeal Tribunal (EAT) where a joint appeal was heard, however Neal v Freightliner settled before the appeal hearing.

The EAT has upheld the decision that “non-guaranteed” overtime should be included in the calculation of holiday pay. “Non-guaranteed” overtime is where the employer is under no obligation to offer overtime to employees, but where it does so, the employee is obliged to perform it and gets paid for it.

What is not clear from the outcome is the treatment with regard to “voluntary overtime”.  “Voluntary overtime” is overtime which is offered by the employer but which the employee is able to decline.  The line on voluntary overtime becomes particularly blurred in circumstances where, although the overtime is “voluntary”, the employee feels obligated to accept it. 

This decision brings huge cost implications for employers whose contracts of employment include an obligation to work overtime when offered.  The only positive in this scenario is the fact that the tribunal direction restricts the payment of arrears in respect of underpaid holiday – normally only looking at a retrospective 3 month period.   

The Government estimates that one-sixth of the 30.8 million people working in the UK get paid overtime, which means around five million workers could be entitled to more holiday pay which will increase ongoing staffing costs.

The administrative burden on employers will also be significant. Employers with large numbers of employees and/or a long history of using overtime will need to find records of which employees have worked overtime, how much they worked and potentially what they are owed. Many of this will have to be calculated manually unless employers are fortunate enough to have a sophisticated payroll system to that calculate this.

Entitlement to statutory holiday pay applies equally to workers, not only employees; therefore employment agencies would need to negotiate contracts including the additional holiday pay costs they are incurring.

Future implications would be seen on pensions and bonuses if holiday pay is used to calculate these payments. Also, financial costs could be more severe for businesses where TUPE transfers are common.

Not only does this impact companies, workers could be negatively impacted also. Although workers may be pleased at the thought of receiving a backdated holiday pay payment, moving forward employers may be less likely to offer overtime because of the further complications it brings when calculating holiday pay. Therefore, workers could potentially be worse off.

Given the financial implication for companies, it is highly likely that there will be an appeal by the Appellants to the Court of Appeal. Brian Gordon, Managing Director of Bear Scotland stated how he is disappointed by the decision.  He added how the company will reflect on their position before considering how to respond.

Details of the ruling, in particular whether claims can be backdated, and if so, how far back, have yet to be released. We will report more as it is released, keep an eye on @AspireBusiness. 

Read the full judgement here.