Holiday Pay and Overtime – An important judgment from the Employment Appeal Tribunal

In a decision with far-reaching consequences for UK industry, the Employment Appeal Tribunal (“EAT”) has today ruled on the cases of road repair firm Bear Scotland v Fulton, engineering firm Amec v Lawand industrial services group Hertel v Wood who were appealing successful Employment Tribunal claims by their workers for increased holiday pay.

Under current UK law, employers need only take account of a worker’s basic pay when calculating holiday pay, but the EAT has ruled in favour of the workers and confirmed that normal levels of overtime should also be included in the calculation.

There are just under 31 million people in work across the UK, and it is estimated that 5 million of these regularly do overtime.  Often this is paid at higher than normal rates, particularly when during the evenings or weekends.  For many, overtime is a normal part of their job and they rely on the extra money to top up their pay and maintain their standard of living.  Today’s decision will affect millions of workers and will have an impact on UK industry running into billions of pounds.

The Decision in Detail

There are four main parts to the EAT’s decision:

  1. Holiday pay must include a payment reflecting normal levels of non-guaranteed overtime
  2. This applies to the normal 20 days basic holiday pay, not the additional 1.6 weeks introduced by regulation 13A of the Working Time Regulations (which are usually given by employers on the 8 normal public holidays)
  3. Claims may be backdated, but only if it is less than 3 months since the last incorrect payment
  4. Any travel time payments which are over and above the actual cost of travel, and therefore taxable, should also be included in holiday pay calculation

The EAT refused to allow the case to be referred to the Court of Justice of the European Union (“CJEU”), but granted leave for the employers to appeal to the Court of Appeal.  Whilst this means that a final decision is likely to be a matter of years away rather than months, the Court of Appeal is unlikely to reverse the EAT decision as there is already an EU precedent for today’s ruling.

In the case of British Gas v Lock in May 2014, the CJEU looked at the holiday pay of a British Gas worker paid 40% basic pay and 60% commission.  It found then that his holiday pay should be calculated taking account of the commission as well as basic pay and since then it has only been a matter of time before the UK courts reached a similar conclusion.

The reaction from Business and Union groups

Unsurprisingly the reaction of business groups to today’s ruling has been almost universally negative.  The British Chambers of Commerce, the CBI, the Institute of Directors, the Federation of Small Businesses and the manufacturers association the EEF have all criticised the ruling.  Comment has ranged from citing “unbearable pressure” on UK employers, “spiralling costs” and the EEF’s calculation that over 3% may be added to the wage bill of more than two thirds of its members.

Employers may take some comfort however from the fact that the ability to make retrospective claims has been limited to a much shorter period than expected.

Trade Unions on the other hand have broadly welcoming today’s EAT decision.  The general secretary of the TUC, Frances O’Grady played down the impact on business saying “Scaremongering about the possible impact of this ruling is irresponsible. British business is far more robust than some of its spokespeople would admit”.

Howard Beckett, a director of trade union Unite who helped bring the case today said “Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order”.

The reaction from Government

It is rare for employment law cases to provoke a strong reaction from Government.  Today’s ruling however prompted an immediate response against the ruling, with a spokesman for the Department for Business, Industry and Skills telling the Daily Telegraph that “We do not believe voluntary overtime should be included in holiday pay and are concerned about the potential impact on employers”.

The Business Secretary Vince Cable must have been expecting the decision and has already announced that he is setting up a taskforce to assess the implications of the judgement on UK industry.  He was quoted as saying “We will review the judgment in detail as a matter of urgency to properly understand the financial exposure employers face. The group will convene shortly to discuss the judgment.”

While this might sound suitably even handed, the accompanying press release said that the taskforce would “provide a forum to discuss how the impact on business can be limited” and stated that it would consist of Government departments and seven employer’s organisations.  Given the complete lack of representation from employee organisation, Unions or law centres, it has been suggested that one might predict the outcome of the exercise with some degree of certainty!

Conclusions

Today’s ruling by the Employment Appeal Tribunal is another step towards a major change in the way holiday pay is calculated in the UK, bringing it in line with European practice.  Employers shouldn’t panic, as nothing actually changes today – an appeal is quite likely and it will take time for the Government to make the necessary changes to UK legislation.

It is safe to assume however that if the UK stays in the EU (admittedly not guaranteed) then this change will happen at some point in the short term future.  Employers should at least look to understand how the ruling will affect them and what the likely financial impact may be further down the line.  If the EEF is correct, wage increases of 3% might be expected, and while this is undesirable for a business it probably won’t cause many failures in itself.  Good budgeting will be as important as ever, together with the right specialist legal advice on when and how to implement the changes.

For employees, again nothing changes today, but where overtime is regular and a material percentage of earnings, holiday pay should increase once the legal cases are completed and legislation updated.  Some employers will get it wrong, and legal advice will be needed to ensure that employees’ rights are upheld.

For Further Advice

If you are an employer or employee who would like to find out more about today’s EAT ruling, please contact us to talk to one of specialist employment law solicitors.  We can explain the impact in easy to understand terms and assist with any aspect of employment law for businesses and individuals.  Contact us today on:

Tel:          01245 893400
Email:     [email protected]
Web: www.backhouse-solicitors.co.uk

Minal Backhouse
4 November 2014