Alerts and Updates

UK Employment Appeal Tribunal Rules That Overtime Pay Should Be Included in Holiday Pay

November 4, 2014

Employers may want to start including overtime that can be construed as "normal pay" in holiday pay going forward.

The Employment Appeal Tribunal in the United Kingdom ruled today that in determining "pay" for the purposes of paid holiday entitlement for those undertaking their employment duties in the UK, remuneration for voluntary, non-guaranteed overtime must be taken into account if it forms part of the individual's normal pay. This will potentially have implications for employers in the form of increased payment and tax obligations in respect to holiday payment for many employees. However, although press reports have appeared somewhat alarmist in the area of retrospective claims, panic is likely to be premature in this area.

Background

Under Article 7 of the European Union (EU) Working Time Directive, employees are entitled to four weeks' paid holiday each year. There are no details on how appropriate pay should be calculated, but EU case law has ruled that "normal remuneration" should be paid. The UK's interpretation of the law has, since 1998, been that pay means, in most cases, basic pay with no account being taken for those who work overtime or receive variable pay.

Ruling

The Employment Appeal Tribunal ruled on 4 November 2014 that payment for voluntary, non-guaranteed overtime should be included in holiday pay. This was based on the fact that, in the cases before the court, the overtime constituted part of the employees' "normal remuneration."

Impact

As stated above, the press has given this case considerable publicity and has suggested that the ruling could result in complex, backdated claims in the sum of millions of pounds—potentially impacting numerous employers, including many small businesses. However, as is often the case with these matters, things are not that simple.

First, leave has been granted to take the case to the Court of Appeal, and thus, the issue will likely remain unresolved for some time longer. From there, it may even go to the Supreme Court or European Court.

Second, it is not the case that all forms of variable remuneration now need to be taken into account in considering holiday pay. Discretionary pay, such as bonuses, is still not part of "normal pay." Cases in which overtime, commission or related variable pay is not a normal pattern of remuneration will be unaffected by the ruling.

Third, the ruling also included an interpretation of the law on the time limits in relation to claims. Claims for unlawful deductions from pay have to be made within three months of the deduction or the last of the "series of deductions." The court held that a "series of deductions" could not include different holidays taken more than three months apart over a number of years, but that each holiday, if taken more than three months after another, formed a separate deduction or series in itself. If this position is upheld by a higher court, it constitutes a key limitation on potential claims. Broadly speaking, if employees have taken and been paid for holiday more than three months ago, they have no claim. In respect of holidays taken within the last three months, their claim is limited to that holiday only unless they have taken another holiday within the three months prior to the last, which is factually unlikely.

What employers should consider

Employers may want to start including overtime that can be construed as "normal pay" in holiday pay going forward. However, in relation to requests for back payment where the holiday has already been taken, the current ruling means there is no liability when a gap of more than three months has elapsed from when the holiday was taken and the related holiday pay paid. Although employers may face some claims, they should be aware of the limitation issue and consider their action accordingly.

For Further Information

Should you require further details about this Alert, please contact Jenny Wheater or Sue Laws in our London office, any member of the Corporate Practice Group, any member of the Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.