The Employment Tribunal made a decision on holiday pay at the end of 2014 which has the potential to affect any employer that requires its workers to work overtime – both guaranteed and non-guaranteed compulsory overtime worked by a worker should be included when the employer calculates his or her holiday pay. Importantly, employees can also make claims for backdated holiday pay.
The decision confirms that overtime required to be worked by workers under their contract constitutes part of their ‘normal’ pay – thus compulsory overtime should be included when calculating holiday pay. ‘Overtime’ in this decision related to non-guaranteed overtime, that is, overtime which the worker is required to work if so asked by the employer but which the employer does not guarantee to provide. Strictly speaking, voluntary overtime (overtime which the worker is not contractually obliged to perform) is not covered by the decision. However, given European case law, it seems very possible that voluntary overtime will be included in calculating holiday pay going forward.
Whilst not specifically dealt with in this case, other elements such as commission, shift allowances and any other payment the employee is normally paid for doing his job (as opposed to reimbursement of expenses) will fall within the Tribunal’s definition of “normal” pay – namely, has it been paid for a sufficient period of time to be considered part of that employee’s normal remuneration. It is also worth noting that at this stage bonuses are unlikely to be included as, for the most part, they are defined as discretionary and unlikely to form part of “normal” remuneration.
The impact on employers
Firstly, the ruling only applies to the mandatory four week holiday entitlement provided for by the European Working Time Directive, which for full-time workers is 20 days. Technically, it does not apply to the additional 1.6 weeks given to workers in the UK or for any additional holiday entitlement provided for by the employee’s contract of employment although it may be simpler, administratively, to avoid different rates of holiday pay for different parts of an employee’s holiday entitlement.
Also, a time limit has been placed on claims that can be made by employees for back pay. Employees who, as a result of the ruling, have been underpaid historically may have a claim for unlawful deductions from wages. The employee must bring a claim for unlawful deductions in the Tribunal within three months of the date of the deduction or, where there has been a series of deductions, within three months of the last deduction. However, the Tribunal held that only deductions made within three months of each other count as part of a series.
To put this into practice, if an employee was paid holiday pay in April last year and then again in November they would only be able to make an unlawful deductions claim in respect of the November payment as there is more than three months between the deductions.
Practical changes employers need to make…..
Technically, now the ruling has been made, employers should start to factor in regular overtime into holiday pay from now on. Calculation of holiday pay will continue to be by way of reference to a “week’s pay” which means that where a worker’s pay fluctuates on each pay date, the calculation of a week’s pay will be the average amount the worker was paid in the 12 weeks immediately preceding the holiday period.
Practically, employers need to communicate with their payroll providers or investigate whether their current payroll systems are able to deal with this change. Employers will need to consider whether it is simpler to pay at the enhanced rate for all holiday pay going forward or whether there is the facility to differentiate between the four weeks under the Working Time Directive and the additional holiday an employee receives under the UK statutory leave and any contractual entitlements.
A further consequence is that, with costs for all employers increasing, it may be more cost effective longer term to use agency staff rather than to encourage overtime to be worked by employees.
Finally, it is important to note that the Tribunal has given permission for its decision to be appealed and so we may not have a definitive decision for some time. If employees do issue Tribunal claims for unlawful deductions then it is likely that these will be suspended if and until there is a further decision made on appeal.