Overtime and annual leave

Allison Cook reviews the key developments in relation to pay when an employee is on annual leave, including the Bear Scotland ruling and prospective Government guidance.

The law in relation to holiday pay has been continually developing partly because key terms in both domestic and European legislation are not defined and are open to interpretation, and partly due to the differing interpretations reached by domestic and European courts.

Interpreting national legislation, the Court of Appeal held ten years ago that compulsory, non-guaranteed overtime should not be included in holiday pay under the Working Time Regulations 1998 (WTR 1998). However, the European Court of Justice (ECJ) held more recently that holiday pay should reflect 'normal pay' under the Working Time Directive 2003 (EU Directive), including elements of commission.

The question of what is included as 'normal pay' has subsequently been interpreted in a number of recent cases. In Bear Scotland Ltd v Fulton and related cases it was argued that compulsory, non-guaranteed overtime should be included as 'normal pay' for the purpose of calculating holiday pay. The EAT agreed with this argument. In an effort to minimise the retrospective impact of the decision and to give greater certainty the Government has announced that it will be introducing new regulations

The background

The question of what payments should be made to an employee while they are on annual leave has been developing since the introduction of the right to paid annual leave in the Working Time Regulations 1998 (WTR), which sought to implement the European Union’s Working Time Directive into UK law. Under the WTR, a week’s pay for the purposes of calculating the amount of holiday pay is based on an employee’s normal working hours – their basic pay, in other words, with non-guaranteed overtime hours being ignored.

That view changed with the European Court of Justice’s decision in Williams v British Airways which determined that an airline pilot’s holiday pay should include remuneration that is ‘intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment’. In the subsequent case of Lock v British Gas Trading Limited, a salesman successfully argued that his holiday pay should take into account the commission that he usually received – otherwise he would be deterred from taking annual leave. The stage had been set for an employee to claim that their holiday pay calculation should take into account overtime payments that they received for working non-guaranteed overtime. This was the subject of the claimant’s claim in the Bear Scotland case, with the decision handed down by the EAT on 4 November, 2014.

Decision

In Bear Scotland the claimants, with the support of union Unite, argued that compulsory, non-guaranteed overtime should be included as 'normal pay' for the purpose of calculating holiday pay.

The EAT agreed with this argument, finding that, for the purposes of calculating holiday pay, "normal pay is pay which is normally received". However, is it really as simple as that? Looking in detail at the decision three key points emerge.

Firstly, the EAT decision only considered obligatory ‘non-guaranteed’ overtime. This is overtime that a worker is required to work if requested by their employer but which the employer is not obliged to offer. This is not the same as ad-hoc or voluntary overtime, and so some uncertainty still remains as to whether overtime which is not guaranteed and which is truly voluntary for the employee will fall within the scope of ‘normal pay’.

Next, the entitlement only applies to the basic entitlement of four weeks’ annual leave under EU law and does not apply to the additional 1.6 weeks’ leave entitlement under national law. This potentially serves to limit an employer’s exposure to both back pay and arrangements for the future.

Lastly, the EAT also held that travel time payments which exceed expenses incurred, and which amount to additional taxable remuneration, should also be included as ‘normal pay’ when calculating holiday pay.

Backdated holiday pay

There has been considerable concern over the impact of this ruling on employers, particularly the possibility for claims to be backdated to 1998 when the WTR was introduced. Employers will be relieved to hear that the EAT held that any break of three months between underpayments of holiday entitlement will ‘break the chain’. This means that a worker could only, it seems, bring a claim for those deductions that occurred after the most recent period of three months during which no deductions were made.

Where now from here?

The proposed regulations will provide that (save in certain limited exceptions) claims for unlawful deductions from wages cannot be brought in respect of payments which fall more than two years before an ET1 is lodged. They will also state that the right to paid holiday is not incorporated into employment contracts. The intended combined impact will be to prevent the potentially significant impact of large backdated claims for holiday pay.

It is intended that the regulations will be effective from 1 July 2015, meaning that there is a small window in which workers with existing claims for unpaid holiday stretching back more than two years may be able to bring their claims. Nonetheless, the decision in Bear Scotland currently makes it difficult for workers to bring backdated claims as any break of three months between underpayments of holiday entitlement will 'break the chain' of deductions.

Turning to practical issues, the Presidents of the Employment Tribunals in England, Wales and Scotland have issued guidance on the procedure that employees can follow in order to amend existing claims for holiday pay that they might already be pursuing against their employer. Claimants may now apply for an existing claim for holiday pay to be amended to include holiday pay that has only accrued after the original claim was commenced - so could not be claimed when the original claim was started.

This guidance potentially saves claimants from issuing a brand new claim (and incurring a fresh issue fee for doing so) which they would have been required to do previously in order to bring their claims up-to-date.

Employers may continue to oppose a claimant's application to amend the original claim to include accrued holiday pay, and will usually have seven days from the date of the claimant's application to do so.

Allison Cook is a Senior Associate at Veale Wasbrough Vizards. She can be contacted on 0117 314 5466 or This email address is being protected from spambots. You need JavaScript enabled to view it..