The UK Employment Appeal Tribunal (EAT) has recently ruled under the Working Time Regulations (WTR) that non-guaranteed overtime should be factored in when calculating the amount of holiday pay that an employee is entitled to. What does this mean?
The EAT held that payments for overtime which a worker is required to work but which an employer is not required to offer (non-guaranteed overtime) is “normal remuneration”.
This means that non-guaranteed overtime should be taken into account when calculating holiday pay for the purposes of the minimum four weeks’ statutory annual leave required by European legislation.
However, the EAT has significantly limited how far back workers can go when claiming.
What does this mean in practice?
Does it apply to all overtime payments?
No, the verdict only applies to “non-guaranteed overtime”.
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It is however likely that case-law will develop on whether or not overtime is voluntary. Each employer will need to carefully review how their contracts are phrased and what custom and practice has developed in their workplace in relation to overtime.
Does it apply to all leave?
No, the ruling makes it clear that it only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. In the UK we have a minimum of 5.6 weeks’ annual leave meaning that the UK has a minimum period of leave in excess of the European minimum. The remaining 1.6 weeks’ holiday (as required by UK law) or any additional contractual holiday can be based on basic salary, excluding overtime.
Are potential claims limited?
Yes, if there is a gap of three months or more between claims of incorrect holiday pay then this will break the chain for any claim.
For example if an employee took holidays in November, September and April, the employee may be able to link the underpayments in November and September together as a series of deductions. However, they would not be able to link bank to April as there is a gap greater than 3 months between April and September.
What should businesses do now?
Businesses with non-guaranteed overtime have several options:
1. Do nothing
By doing nothing a business is potentially inviting members of staff to make a claim against the business. However, this may be worth the risk as leave to appeal has been granted and therefore the verdict could be overturned.
When making this decision, employers should consider:-
- How many employees could be affected
- how frequent non-guaranteed overtime is offered
- the terms of employment contracts
- setting aside a provision in financial accounts to mitigate the effect of potential future claims
If in doubt, an employer should take advice.
2. Include overtime payments whenever annual leave is paid
The main advantage of this option is that by including overtime in holiday pay, the employer is potentially limiting how many potential underpayments can be linked together.
However, the employer will need to weigh up this advantage against the additional costs and administration involved.
The judgment only applies to the four weeks under European law. It does not apply to the additional 1.6 weeks given under UK law.
This means that it may be open for an employer to instigate a split method of paying holiday pay where the first 4 weeks include overtime and the remaining 1.6 weeks do not.
Employers who feel particularly exposed to potential claims should consider taking action now to take advantage of the discrepancy between EU and UK minimum holiday allowances.
The verdict given by the EAT can best be seen as a 1-1 draw for employers and employees.
On one side the employees have crystalised a right to have non-guaranteed overtime payments included in their holiday pay. On the other side, the outcome is not as bad as it could potentially be for employers given the tight deadlines imposed on employees to bring claims. The court has granted leave to appeal and on that basis the decision could yet be overturned.
In the interim period Vince Cable has announced that he is setting up a taskforce to consider the impact of the EAT’s ruling. The group will convene shortly to discuss the judgment.
This briefing has been produced for information purposes only and is based on the law and other information available at the time of writing. We cannot be held responsible for any losses incurred through acting or failing to act on the basis of anything contained in this briefing.
If you require advice on any of the matters referred to, please contact us so that we can advise you, taking account of your own particular circumstances and requirements.