In November 2014, an important decision from the UK Employment Appeal Tribunal (EAT) ruled that voluntary overtime pay should be included in employee holiday pay.
The judgment changes our previous understanding of the law and has serious ramifications for employers engaging workers whose pay includes variable components to supplement basic salary, particularly those in retail, food and beverage, construction and manufacturing.
The decision on the Bear Scotland Ltd. v Fulton and other consolidated appeals has wider implications on the complex question of how employers should calculate the amount of pay that employees receive during periods of holiday absence. Many employers, relying on the previous UK rules, have limited holiday pay to basic salary (excluding overtime, commission and other allowances). This decision confirms that this approach is not always adequate and employers could now face retrospective claims for the underpayment of holiday pay.
The EAT ruled on four key points as follows:
- Non guaranteed overtime should be taken into account when calculating employees’ holiday pay.
- Certain allowances (e.g. travel time payments which constitute taxable remuneration and are not expense reimbursements) should also be taken into account when calculating employees’ holiday pay.
- These requirements to include overtime pay and allowances only apply to the mandatory four weeks’ holiday required by the European Working Time Directive (the EU Directive) (and not the additional 1.6 weeks’ leave that UK employees are entitled to under the UK Working Time Regulations (the WTR)).
- Any claim for unpaid holiday pay must be brought within three months of the underpayment (or the last in a series of underpayments) and any interval of three months or longer between vacation periods will break the chain in any series of underpayment.
The decision follows recent European Court of Justice (ECJ) cases which held that certain allowances and commission payments formed part of the employee’s normal pay and therefore should be included in any calculation of their holiday pay.
In recent cases, the ECJ ruled that employees must receive their normal remuneration during holiday which includes:
- Any remuneration which is either intrinsically linked to the performance of tasks which the worker is contractually required to perform.
- Remuneration relating to the worker’s personal or professional status.
These decisions related specifically to the inclusion of certain allowances and commission payments in holiday pay calculations but the EAT decision confirms that the same principle should apply to voluntary overtime pay too.
What does this mean for bonus and commission payments?
It now seems certain that employers should be including all normal pay components in holiday pay including commission, overtime and allowances linked to status or performance. The inclusion of annual or discretionary bonus payments is still a grey area as an employer could argue that these are extraordinary elements of pay and therefore not necessarily intrinsic to the employee fulfilling his contractual duties. Note that the Working Time Regulations (WTR) apply to workers as well as employees so this decision will affect a wide population of workers.
What is the timescale?
The EAT confirmed that employees must claim for the underpayment of holiday pay within three months of taking their last holiday. If more than three months have elapsed since their last holiday, they cannot bring a claim. However, periods of 3 months underpayments can be linked backwards thereby exposing employers to large claims as far back as the earlier of the date their employment commenced or the introduction of the WTR (October 1998). The good news for employers is that Regulations came into force on 8 January 2015 which limited, from 1 July 2015, how far back claims for unlawful deductions of wages can go, including claims for holiday pay. The Deduction from Wages (Limitation) Regulations 2014 (the Regulations) were introduced following discussions with a task force set up by the Government after the cases were decided in November 2014. The Regulations help to protect UK business from “the potentially damaging impact of large backdated claims”. The Regulations prevent an Employment Tribunal (ET) considering deductions which were made more than 2 years before the unlawful deductions claim was brought.
What do employers need to do?
Employers should calculate future holiday pay to include voluntary overtime pay, commission and allowances which are intrinsically linked to the employee’s duties or status.
Employers should also consider amending employment contracts and holiday policies to clarify which periods of leave will be treated as the mandatory four weeks’ leave required by EU law (for which holiday pay must now include overtime, commission, etc.) and which periods of leave will be treated as additional UK leave (for which holiday pay can be calculated under the more conservative interpretation of the UK WTR rules).
For help and advice on the issue and how it will impact on your business, do give me a call.