Overtime and its inclusion in the calculation of an employee’s holiday pay has been a hot topic before courts and tribunals recently. Tribunal decisions have shed some light on the matter and the latest legal position is summarised below. Please keep in mind, however, that this legal position is by no means the final answer as the issue in these cases may be the subject matter of an appeal to a higher court in due course and some are only first instance decisions, with no binding authority.
In order to assist with navigating the current legal position on how overtime affects holiday pay, it helps to look at the different overtime schemes that are in operation.
Compulsory and Guaranteed Overtime
This is when the employer has a contractual obligation to provide overtime and the employee has a contractual obligation to work these overtime hours. Given the mutuality of obligation, we can conclude that such overtime payments form part of a worker’s week’s contractual pay for the purpose of the Working Time Regulations and calculating holiday pay.
However, there’s presently no definitive guidance on how the holiday pay should be calculated and enhanced to reflect the inclusion of such overtime payments in addition to the basic pay. Some have suggested it prudent to use the average pay over the previous twelve worked weeks.
The introduction of The Deduction from Wages (Limitation) Regulations 2014 also means that any claim brought on or after 1st July 2015 for backdated deductions from wages for holiday pay will be limited to a two-year period.
Compulsory but Non-Guaranteed Overtime
This is when the employer is not obliged to offer overtime, but the employee must overtime if it’s offered.
The case of Lock v British Gas, which didn’t concern overtime payments specifically, but whether commission payments should be included in the calculation of holiday pay, offered some guidance on this matter. The decision in this case found that employees with regular working hours, whose remuneration includes commission or similar payments (arguably overtime payments) should have a week’s pay, for annual leave purposes, calculated at the average rate over the previous 12 weeks, and this will include commission, not only basic salary.
The Bear Scotland v Fulton case quickly followed the case of Lock and it clarified that any compulsory but non-guaranteed overtime worked will need to be taken into account when calculating holiday pay when annual leave is taken. The judgement in this case also outlined that such overtime only needs to be calculated for the four week annual leave entitlement derived from EU legislation (the Working Time Directive). It does not apply to the additional 1.6 weeks of annual leave provided for under UK law (the Working Time Regulations 1998), or any additional contractual holiday.
A failure to enhance holiday pay in this way could potentially lead to unlawful deduction from wages claims.
However, the case also confirmed that anybody making a claim must have had an underpayment for holiday pay that had taken place within three months of lodging an employment tribunal claim. In addition, if a claim involved a series of underpayments, any claims for the earlier underpayments would fail if there had been a break of more than three months between those underpayments.
Voluntary Overtime
This is where there is no obligation on the employer to offer overtime and equally there is no obligation on the worker to accept it.
In way of some guidance, the Northern Ireland Court of Appeal, in Patterson v Castlereagh Borough Council, considered this matter and held that there is no reason in principle why voluntary overtime should not be included when determining entitlement to holiday pay, if it is normally carried out and is an “appropriately permanent feature” of the worker’s remuneration. However, this case is not binding in England, Wales or Scotland.
The case of White & Others v Dudley Metropolitan Borough Council now takes this a step further, answering ‘yes’ to the question as to whether voluntary overtime can fall within the calculations for holiday pay. White found that excluding voluntary overtime for work done with “sufficient regularity” from the calculation of holiday pay was in breach of the Working Time Regulations. Work that was done with “sufficient regularity” was able to be regarded as part of an employee’s normal remuneration.
The decision in White is not binding on any other employment tribunal, but may be considered as a useful indicator as to how other tribunals may consider treating voluntary overtime in calculating holiday pay due. Until such a time the aforementioned cases indicate that tribunals will be supportive of including voluntary overtime in calculations.
What should you do?
Employers with employees who regularly undertake overtime and who do not factor that in to holiday pay calculations need to be aware that continuing such a practice is against tribunal and EAT decisions on this matter. This is, however, a complex issue which could be subject to further appeal to higher courts and therefore the legal position may be regarded as still uncertain.
Employers may want to consider holding fire on making changes to the way in which they carry out their holiday pay calculations to include any form of overtime. Whilst it might be assumed that the “12 week average” used for other pay calculations might apply, it could well be argued that this would not accurately reflect overtime in all cases, particularly where work is seasonal. Many employers are therefore maintaining a “wait and see” approach, but ultimately it is a matter for each employer to weigh up, particularly if employees are starting to make claims for back pay.
One aspect that employers may want to consider is the effect that any decision will have on staff morale. If a “wait and see” approach is adopted and employees are aware of the recent legal developments in this area, they may feel they are being underpaid and their employer is doing nothing about this. Employers may want to consider how they communicate this approach to members of staff to ensure that levels of morale and performance are maintained.
Any definitive answer on how overtime should be calculated is likely to come from case law. It’s therefore impossible to predict when this might be. Employers may want to consider setting a cut-off point for the “wait and see” approach if they feel that poor employee morale could have a negative impact on their business.
Hopefully this article has given some clarification to the various overtime options available and how they affect holiday pay. If this article has raised any questions for your organisation, then please call us on 0330 223 5253 or office@fitzgeraldhr.co.uk.
