• Holiday pay following Bear Scotland judgment on overtime

  • 6 Nov 2014
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Guidance on next steps for employers after landmark EAT case

It's not every day that Employment Appeal Tribunal (EAT) cases make front-page news. But recently a major decision about whether overtime needs to be included in holiday pay calculations has made the headlines. Employers across the UK have been waiting with baited breath for the judgment in three conjoined cases which the EAT heard at the end of the summer - Bear Scotland v Fulton, Hertel v Woods, and Amec v Law.    

The reason that employers have been so concerned about the implications of this judgment is that a previous line of cases (including British Airways v Williams and Lock v British Gas) suggested that holiday pay calculations needed to include certain additional payments, such as commission, provided they were "normal remuneration". These cases established that a failure to pay such amounts could result in employers being sued for underpayment of holiday pay potentially going back many years. The consequences of these decisions for some employers, especially in sectors where allowances and additional payments such as overtime are paid regularly, are considerable.

What overtime needs to be included?

The EAT’s decision provides both good and bad news for employers. In terms of the bad news, the judgment confirms that normal ‘non-guaranteed’ overtime (overtime that the employer does not guarantee to provide) is to be included in the calculation of holiday pay in certain circumstances. This is not a surprise as it is consistent with the principles set out in earlier cases. The judgment clarified that non-guaranteed overtime should only be paid where it comprises part of ‘normal remuneration’ (the EAT said there was a time component involved when deciding what is ‘normal’).

The EAT considered that it was important that in these three cases the employees had an obligation to work overtime, even though the employer had no obligation to provide it. The EAT also thought it was relevant that employees were regularly required to work the overtime. This suggests that overtime worked occasionally, or which employees are not required by their employer to work, may not have to be included in holiday pay calculations.

How far back can claims go?

A key part of the judgment provided good news which surprised some employers. A claim for a series of unlawful deductions from wages for underpayment of holiday pay normally needs to be brought within three months of the last in the series of deductions (subject to certain exceptions).  The judgment has considerably limited the scope for employees to show that underpayments form part of a series. The EAT held that if there is a gap of more than three months, during which there is no underpayment of holiday pay, then an employee cannot argue that a further underpayment forms part of the same series of deductions. This could allow employers to limit their liability by arguing that parts of many claims for back pay are out of time.

How does the enhanced rate apply?

It is clear that the requirement to include certain non-guaranteed overtime in holiday pay only applies to the four weeks' holiday pay entitlement which derives from the EU working time directive (referred to as Regulation 13 holiday entitlement).  The additional 1.6 weeks paid holiday that UK employees are entitled to under the Working Time Regulations 2008 (Additional Leave) does not need to include an amount for non-guaranteed overtime.

Can employers decide which days are paid at the enhanced rate?

The EAT suggested that employers should be entitled to direct when Regulation 13 holiday should be taken (subject to the restrictions in the Working Time Regulations about taking holidays). The EAT also commented that the additional leave should be the last to be agreed on in the leave year.

Is this position likely to change?

The EAT gave permission for the decision to be appealed. So although employers are in a clearer position now than they were before, that could all change. Employers will need to take advice about the pros and cons of acting on the basis of this judgment to try to avoid future claims.  Some may prefer to wait and see if there is an appeal.

Will the regulations be amended?

The judgment confirms that the UK’s working time regulations can be interpreted in a way that complies with the working time directive in relation to the requirement to include non-guaranteed overtime in holiday pay calculations.

The government has now announced that it is going to set up a task force to assess the impact of the ruling for employers, so further developments may be in the pipeline. 

Elaine McIlroy is a senior associate at MacRoberts

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Comments (2)
  • Really unhelpful that ACAS is advising, oversimplistically, that this ruling means voluntary overtime should be included in holiday pay calculations. Thank you CIPD for reading the judgement more thoroughly.

  • The one part of this that is proving difficult to interpret is how to work out what is 'normal' pay. This article states the 'EAT said there was a time component involved when deciding what is normal', but my question is 'What is the time component?'. There seems to be a gap in the judgement which means there are still uncertain elements which could lead to further non-compliance; how do we determine what is 'normal'? How do we decide what is regular and irregular overtime? These are questions I am being asked by our board and at the moment I am struggling to provide answers that do not contain a high level of uncertainty.