Overtime and holiday pay – Impact of the recent court ruling

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What does the recent ruling from the Employment Appeal Tribunal (EAT) that

overtime should be taken into account when holiday pay is calculated mean for

businesses in practice?

The case:

It was brought by Britain’s largest union, Unite, against Amec and Hertel and included 16

workers who were Unite members (a mix of electricians, scaffolders and semi-skilled

operatives) who worked on a project at the West Burton power station site in

Nottinghamshire until it came to an end in 2012. During that time they were consistently

required to work overtime and received payments for travel time. Payments for that work

were not included in their pay when they took holiday, meaning that the workers received

considerably less pay when on holiday, compared to when they were working.

The ruling:

The EAT ruled that people obliged to work overtime should have overtime pay and other

bonuses and allowances included in their holiday pay. This ruling could lead to pay-outs

worth thousands of pounds and paves the way for similar cases.

What this means in practice:

The ruling relates to “non-guaranteed overtime” as opposed to voluntary overtime.

“Non-guaranteed overtime” is overtime which an employer is not obliged to offer but

that the employee is contractually obliged to do, if offered – so, first off, check the

wording of your employment contracts to see if this applies to your employees.

The requirement to include overtime only applies to the first four weeks (including

bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks’

holiday (as required by UK law) or any additional contractual holiday can be based

on normal remuneration excluding overtime.

If there is a gap of three months or more between claims of qualifying holiday pay

then this breaks the chain for any claim. So, as the requirement to pay holiday pay

only applies for the first four weeks’ holiday, employees are likely to be taking the

additional 1.6 weeks’ holiday or any additional contractual holidays during a

considerable part of any holiday year (and for most, at least a 3-month period). This

would then break the chain for any claims. The maximum risk to most businesses is

likely to be backdated claims for the current holiday year only and, of course,

payment for future holidays following the ruling.

So what should you do now?

Be prepared to answer queries from employees, based on the above guidance.

Particularly, be able to explain why they won’t be entitled to multiple years’ backpay!

Decide how you are going to administer this in holiday pay calculations in practice (if,

indeed, the ruling is applicable to you). For example decide whether you are going to

include overtime

◊ in the first four weeks of holiday pay only,

◊ in the full 5.6 weeks’ holiday pay or

◊ in the full contractual holiday pay entitlement (if greater).

This is likely to be based on a consideration of the administrative costs of having two-

tier holiday payments balanced against the costs of paying holiday pay that includes

overtime for more than the required four weeks.

Consider whether you need to put aside budget in this financial year for any

employees’ claims that may be valid for backdated pay. You could do this reactively,

ie wait to see whether employees intend to bring claims, rather than deal with it

immediately.

To limit the impact of this ruling from a financial perspective, review your contracts

and processes. For example if you have an overtime clause, change it to provide for

“voluntary” rather than “non-guaranteed overtime”. This will mean workers are not

contractually obliged to work the overtime you offer, but at least if they do work it you

won’t have to allow for it in holiday pay.

You could also consider limiting or refusing holidays after periods of high overtime or

using agency or bank staff to cover periods traditionally covered by overtime

It is highly likely that the issue of backdating in this ruling will be appealed, so keep an eye out for future updates.

For further advice, contact Becca on 07551 007591 or email becca.roberts@hrizon.co.uk

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