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Overtime to be calculated in holiday pay

Holiday pay should now include payments for regular overtime and regular commission.

[Updated for 2017]

We look at October 2014’s Employment Appeal Tribunal (EAT) decision that says overtime should be included when calculating holiday pay (the combined cases of Bear Scotland vs Fulton, Hertel vs Wood and Others, and Amec vs Law) and the latest decisions (2016/2017) about commission payments in Lock vs British Gas.

Calculating the amount of pay an employee or worker should receive when on holiday used to be fairly straightforward. However, recent decisions have made the calculation of holiday pay more complicated, and no doubt more expensive for employers.

How to calculate holiday pay

When calculating employee/worker holiday pay, the following elements used to be included:

  • A week’s pay is calculated in accordance with the definition of a working week in the Employment RIghts Act 1996, which says that a ‘working week’ includes basic pay and overtime that is contractual and compulsory, i.e. it is specified in your employment contract and you are required to work it

  • If you work with fixed hours and pay, then the amount due for a weeks pay is the normal pay you receive for a weeks work

  • If you work with variable hours and pay (e.g. bonus, commission) then a weeks pay equals the average hourly rate over the preceding 12 weeks of pay, multiplied by your normal working hours

  • If you work shifts, a weeks pay equals your average weekly hours over the preceding 12 weeks of pay at your average hourly rate

  • If you work with no normal working hours a weeks pay is the average pay you received over the preceding 12 weeks (that were paid)

  • A weeks pay will generally not include benefits in kind – pension, car, health cover. Bonuses, if they are discretionary, may be excluded too. Any salary that is sacrificed through a ‘salary sacrifice’ scheme (e.g. childcare vouchers) may also not be included. Annual contractual bonuses may be included on a pro-rata basis if they are possible to quantify at the point of calculation.

However, recent developments in law since 2014 have confused things!

  • In Neal v Freightliner Ltd 2013, the Judge said that all overtime – contractual and non-contractual, compulsory or voluntary and any shift premiums – should be included when calculating holiday. Compulsory overtime is work that an employer can require the employee to do in addition to normal working hours. Guaranteed overtime is overtime the employee is contractually entitled to receive, and is required to do.

This decision was to be appealed but has since been settled out of court instead – it is not binding as it was only made at an employment tribunal.

  • However, this decision came on the back of a similar 2012 decision from the Supreme Court (after the case had been to the European Court of Justice) in British Airways Plc v Williams, involving pilot’s holiday pay. Their holiday pay is governed by Aviation legislation, which is similar to the Working Time Regulations, but not the same. The Supreme Court said that pilot’s holiday pay should be calculated by assessing average payments made over a representative reference period, which must include their daily flying pay supplements. The Court said that holiday pay must “correspond to the normal remuneration received by the worker”.

Other Important Cases –

1. In Lock v British Gas, Mr Lock was a salesman whose pay consisted of basic pay and commission. The commission fluctuated (based on sales achieved) but on average it accounted for 60% of his pay. He only received basic pay while taking holidays. The Advocate General of the European Union agreed Mr Lock’s holiday pay should include an average sales commission and recommended this decision to the ECJ who in May 2014 agreed.

The Court said that any “aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out…. and in respect of which a monetary amount is provided must be taken into account” for the purposes of calculating holiday pay. This is to ensure that workers are not deterred from taking leave because they could not afford to do so.

The ECJ added that a national court should determine the method of calculating the average Sales Commission. (The Advocate General said that Mr Lock’s average Sales Commission over the last 12 months appeared to be an appropriate amount that should be included in his holiday pay). This case returned to the Employment Tribunal in February / March 2015, to address issues such as the appropriate reference period when calculating holiday pay.

At the end of March 2015, the ET found that workers who are paid commission should receive holiday pay at a rate reflecting normal income (i.e. including commission).

However, in May 2015, British Gas lodged an appeal so the case went to the Employment Appeal Tribunal in December 2015. British Gas were appealing, partly, on the basis that the ET was wrong to decide that Bear Fulton (below, about overtime) had any bearing on how holiday pay is calculated regarding commission. The EAT, in February 2016, rejected British Gas’ arguments and said the Working Time Regulations can be interpreted to provide that holiday pay must include commission payments. The EAT also said that “if Bear Scotland had been wrongly decided then it must be for the Court of Appeal to say so”.

British Gas appealed this and the case went to the Court of Appeal in mid July 2016; in October 2016 the Court gave their decision, which is: they agreed with the EAT and said the Working Time Regulations can be interpreted to include contractual results-based commission in holiday pay, as Mr Lock’s holiday pay should be based on his normal renumeration which included earnings from his commission. The decision only relates to the first 4 weeks of annual leave given under the Original Working Time Regulations and not the extra 1.6 weeks that is given in the UK (or any additional contractual holiday entitlement). The Court did not address the question of the appropriate reference period to use to calculate the commission element of statutory holiday pay. It’s understand that British Gas may now appeal to the Supreme Court so watch this space! In March 2017 it was announced that the Supreme Court have refused British Gas the permission to appeal the Court of Appeal’s decision (that contractual results-based commission should be included in holiday pay). The case will now go back to a Tribunal to due the actual amount due to Mr Lock in back-dated holiday pay.

2. In Summer 2014 the Employment Appeal Tribunal heard 3 other cases – Bear Scotland Ltd v Fulton; Hertel (UK) Ltd v Wood; Amec Group Ltd v Law – the claimants successfully argued in their employment tribunals that their employers should have included regular, but non-contractual, overtime in their holiday pay.

At the end of October the EAT announced their decision and said that regular, non-guaranteed overtime (i.e. overtime the employer does not have to offer but if it does the employee must work it) should be included when calculating holiday pay.

In these cases, overtime was required by the employers and was regularly required. And other payments that form part of normal remuneration, as described by the ECJ in BA v Williams, like shift allowances and travel allowances should be included, following the European Court of Justice decision earlier this year that the UK’s method of calculating holiday pay is too narrow and does not comply with EU law. EU law requires that employees receive their “normal” pay when taking holiday – meaning any payments that are “intrinsically linked to the tasks performed” in doing their job should be included.

What is “normal” – this includes a time element as payment has to be made for a sufficient period of time to justify the label “normal”. What is “regular” – this is not clear, however there has to be a difference between an employee who works beyond their basic hours every week and an employee who works the odd extra hour only a few times a year.

3. In June 2015 the Northern Ireland Court of Appeal heard a case about voluntary overtime (which the employer has no obligation to offer and the employee no obligation to do) in Patterson v Castlereagh Borough Council. Their decision was that if a worker “comes to expect a certain level of pay as normal then he should receive that during his holiday period”. What the definition of “normal” is, they felt was irrelevant, the issue was the amount of normal pay (not how it is composed). This decision is not strictly binding on England and Wales, but is usually seen as persuasive. The case has been sent back to a Tribunal to assess the overtime worked within a ‘suitable reference period’ (not defined).

4. In April 2016 an English court reached a similar decision in White v Others v Dudley Metropolitan Borough Council. Dudley Council employed tradesmen to work on their social housing portfolio who were invited to work on a Saturday on a voluntary basis and could voluntarily go on standby to handle repairs and emergencies every 4 weeks. The tradesmen bought a claim for unpaid holiday pay arguing that the voluntary overtime and standby work was so regular that if formed part of their ‘normal’ work; the Council obviously argued that they were under no obligation to do this extra work. The Judge agreed with the tradesmen that voluntary overtime, voluntary standby and voluntary call-out payments should be considered ‘normal’ pay if undertaken with ‘sufficient regularity’ and so should be used when calculating holiday pay (the tradesmen had done this voluntary work for a number of years). The question still exists as to what is ‘sufficiently regular’? Again this decision is not binding as it was made in the first tier Tribunal, but it is persuasive.

Dudley Council appealed and in August 2017 the EAT confirmed that voluntary overtime was ‘normal’ remuneration where it is paid over a sufficient period of time on a regular basis. The EAT did not offer further guidance on what level of regularity or frequency is required for the payment to qualify as ‘normal’. In this case the EAT found that payments made over several years at a rate of 1 week in every 4-5 weeks was regular. The Council may appeal this decision to the Court of Appeal.may well appeal of course!

So what does this mean, as things stand now?

Holiday Pay should now include payments:

  • For contractual results-based commission (other types of commission it’s not clear!)

  • Guaranteed, compulsory overtime

  • Non-guaranteed, compulsory overtime if this is regularly worked (irregular is not clear!)

  • Voluntary overtime, where this is regularly done

  • Possibly performance bonuses,

  • Possibly some allowances (e.g. travel allowances, travelling time payments, standby and on-call allowances too, that form part of ‘normal remuneration’).

  • Where the tasks workers are doing in this time are intrinsically linked to performance of tasks under the performance of the contract of employment, the ETA in Dudley Council appeared to endorse using a 12 week reference period to calculate holiday pay.

  • Determining whether a payment qualifies as ‘normal’ remuneration is ultimately determined by an Employment Tribunal. Payments which are not usual or which are exceptional will generally not qualify as ‘normal’ remuneration.

  • Employees who wish to claim for holiday pay they believe they may be owed would need to make a claim for an ‘unauthorised’ deduction of wages to an Employment Tribunal.

  • The current decisions (including the October 2016 Court of Appeal decision in Lock) only apply to the first 4 weeks of holiday (that is guaranteed under EU law). It does not apply to the ‘additional’ 1.6 weeks leave that is granted under UK law. The EAT said that it is likely that a worker will take his ‘core’ 4 weeks statutory holiday first and the additional 1.6 weeks last (unless the employer specifies something different). Therefore the ‘core’ 4 weeks holiday can be paid at a different, enhanced, rate to the ‘additional’ 1.6 weeks holiday (unless Employers wish to equalise the payment to save administrative headaches!). How complicated!

  • It is probable that only current workers and recent leavers could make a Tribunal Claim (as tribunal claims normally must be bought within 3 months of the underpayment/deductions). This 2014 Bear Fulton decision limited the claims for historic underpayment by saying that if there is a gap of more than 3 months between a series of ‘unlawful deductions’ then this ‘breaks’ the chain – so if a worker has a 3 month gap between holidays they will only be able to claim for the last ‘deduction’ (underpayment of holiday pay). It is also conceivable that a worker will have a gap of more than 3 months between taking the remainder of their ‘core’ 4 weeks entitlement in one holiday year and taking some of the ‘core’ 4 weeks holiday entitlement in the next year. This means that the majority of claims could be limited.

  • Employees (claimants) in the Bear v Fulton decision are appealing this 3 month limit to the Employment Appeal tribunal, which is likely to be heard later in 2016; the EAT decision in May 2017 confirmed that ‘legacy’ pay claims are limited by a gap of 3 months between successive underpayments (this may yet be appealed!).

  • One question not answered by the Bear Fulton 2014 EAT decision is how far holiday pay claims can go back if there has not been a gap of 3 months between holiday pay payments that have been made. This was answered in December 2014 when the Government announced they would take action to reduce potential costs to employers – by introducing the Deduction from Wages (Limitation) Regulations that impose a 2 year limit on back pay for claims to Employment Tribunals for unlawful deductions from wages related to holiday pay. This is effective from 1st July 2015.

  • Remember, workers, not just employees, are included in this. In King v Sash Window Workshop Ltd – Mr King worked as a salesman on a commission-only basis for 13 years, but was not paid if he took holiday as SWWL considered him self-employed. When Mr King reached 65, in 2012, his contract was terminated and he successfully claimed age discrimination and holiday pay at an Employment Tribunal in 2013 because he was a ‘worker’. This case went to the EAT and then to the Court of Appeal in February 2016 – who were to decide whether he was entitled to pay in lieu, on termination, for untaken leave going back to 1999 (leave he did not take but would have been entitled to take). The CoA has reserved judgement and referred the case to the ECJ – you can read more details about the ECJ decision here.

Finally, decision time?

So, employers now must make a decision as to whether:

  • They do nothing now and wait for further legal developments, or wait to see whether Brexit brings a change to these decisions in the future;

  • They break the chain of historic underpayments (although it will be difficult to calculate correct payments) and settle with their employees for their liability and pay correctly going forward;

  • They pay ‘correctly’ going forward (although you may end up paying more than you need, depending on the final clarification of the law). However, once ‘correct’ payments of holiday pay have been made for 3 months, the worker should no longer be able to bring claims in respect of previous payments, even if they were all ‘underpaid’.

  • In the long term, Employers will need to think about their working arrangements – using agency or bank staff to cover periods of increase demand; preventing leave from being taken at certain times of year; revising commission plans to schedule payments at a time which impacts less on payments for ‘core’ leave.

Employers could now:

  • Audit the different payments they make staff (e.g. commission, voluntary overtime, non-voluntary overtime, shift allowances, other allowances) and see what the impact would be.

  • Review contracts of employment and handbooks to check they accurately reflect how holiday pay is calculated and amend as necessary (including specifying when ‘core’ leave is to be taken, if appropriate).

  • Identify how long relevant staff have worked there and how long potential liabilities may go back for – although presently it is felt that Employers can stand firm on claims bought for significant back pay, based on the fact the UNITE is not going to appeal.

In December 2015 it was announced that the Police Federation of England and Wales has agreed to include overtime in holiday pay for Police Officers from 1st January 2016. The agreement made includes all forms of overtime, unsocial hours payments, acting up allowances, away from home allowances. Police forces will be required to pay a 3-month arrears as a one-off payment and can decide to pay a flat rate of £60 per officer per month, or the actual entitlement.

In March 2016, the South Central Ambulance Service, operating in Hampshire, Oxfordshire, Berkshire and Buckinghamshire, agreed to a claim by UNISON that employees’ holiday pay should include payment for the regular occasions when ambulance crews need to attend a patient after their shift has officially ended (called an “overrun”). The payments will be backdated to April 2015.

And in June 2017, the ET ruled that ambulance workers (at East of England Ambulance Trust) compulsory overtime in relation to shift and shit over-runs should be included in the calculation of holiday pay. This overtime was not guaranteed but was required to be done, and as it was an essential requirement of their job it should be included in holiday pay calculations. The ambulance workers had also wanted that any voluntary overtime they did (their choice) should be included in the calculations too but the ET disagreed as there was no obligation for the workers to do this overtime, so it did not need to be counted.

If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to Lesley at The HR Kiosk – a Human Resources Consultancy for small businesses – our fees are low to reflect the pressures on small businesses and you can hire us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.

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