Business weighs up the cost of ground-breaking ruling on overtime in holiday pay

7th November 2014

Amanda Okill

“Don’t panic” advises law firm Furley Page as implications of EATs ruling are considered in detail

The landmark ruling including overtime in holiday pay for workers will have a cost impact on some UK companies but employers should not be panicked by gloomy predictions in some media and business quarters, advises one employment law expert.

“Press coverage has been inflammatory but when we study the details of the judgement coolly and calmly it is not as severe as you are led to believe by early press reports,” says Amanda Okill, an employment law specialist at leading south east law firm Furley Page.

This week the Employment Appeal Tribunal (EAT) handed down a landmark decision in the case of Bear Scotland v Fulton (and other cases). It alters the way in which holiday pay should be calculated for some workers by confirming that non-guaranteed but compulsory overtime should, along with a worker’s normal pay, be taken into account. Currently, only basic pay counts when calculating holiday pay.

The Government is concerned by the ruling. Business Secretary Vince Cable is to set up a taskforce to assess its impact, while other voices in the business community have struck a pessimistic note: “companies face punitive costs potentially running into billions of pounds, and not all will survive,” warned CBI director general John Cridland.

Amanda advises that the EAT ruling could yet be referred to the Court of Appeal, meaning a final decision may be years away.

“What needs to be appreciated, however, is that the case is not about voluntary overtime. In each of the appeals, the workers were required to work overtime, although it was not guaranteed by the employer,” she adds.

She explains that until recently, the UK’s position on the subject has been to restrict a worker’s holiday pay to their basic earnings only. Any overtime was to be ignored unless it was both ‘guaranteed’ and ‘compulsory’, as illustrated in the Court of Appeal’s ruling in Bamsey & ors v Albion Engineering & Manufacturing plc [2004].

Mr Bamsey had a contract requiring him to work 39 hours a week. Often, at the request of his employer, he worked overtime. The hours were compulsory but not guaranteed and, according to the Court of Appeal, the employer was correct in its calculation of holiday pay based on a 39-hour week only. The practical effect was that an employer could insist on a employee working overtime when needed but then fail to recognise this in the worker’s holiday pay, leaving them financially worse off during periods of annual leave.

Amanda says that this position has recently been challenged in our national courts and in the European Court of Justice with reference to the European Working Time Directive, which requires payment of “normal remuneration” during holiday.

Until the decision of Bear Scotland, the most controversial ruling on the subject by UK courts was that of Neal v Freightliner (ET/2012). Mr Neal’s contract provided for a 35-hour working week. In practice, he often worked overtime, sometimes up to 12 hours a day. His employer referenced his holiday pay to the usual working hours of 35 per week. Mr Neal argued that this approach did not result in a payment of “normal pay” as required by the Directive. He argued that holiday pay should reflect his actual hours of work.

Amanda says: “The tribunal agreed with Mr Neal. The case was listed for an appeal at the end of July 2014 but settled prior to the hearing. Given that this was a first instance decision, it did not set a definitive ruling on the subject which could bind higher courts. Nonetheless employers feared that it was indicative of a direction soon to be followed. This has proved to some extent correct.”

The main points in relation to overtime in the EAT’s ruling in the case of Bear Scotland are:

  • non-guaranteed but compulsory overtime should be taken into account in the calculation of holiday pay
  • this calculation applies only to the basic four weeks’ leave guaranteed under the Working Time Directive, not the additional 1.6 weeks under the UK Working Time Regulations
  • claims for arrears of holiday pay will be out of time if there has been a break of at least three months between successive underpayments.

Amanda says: “Employers will naturally be worried about this ruling, particularly in industries which rely on overtime. There are practical considerations on which we will need further guidance. However, employers will need to change the way in which holiday pay is calculated to include compulsory overtime worked by their staff.

“A further point of note in this case and one which employers will no doubt appreciate is that the EAT has limited workers’ ability to bring longstanding claims for back pay, stretching back 16 years, as was feared. It ruled that where there is a gap of at least three months or more in a series of deductions, the gap will have the effect of breaking the chain, thus restricting a worker’s ability to bring costly, longstanding claims which predate the gap,” she adds.

Do you have a concern about the ruling and what it might mean for your business? Employers seeking further guidance can contact Amanda Okill on 01227 763939.

 

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