Holiday Pay Must Include Overtime but Limit Imposed on How Far Back Claims Can Go

The EAT has ruled that employers must include overtime pay when calculating holiday pay under the Working Time Regulations 1998. However, strict limits have been imposed on how far back claims can go. 

In the joined cases of Bear Scotland v Fulton, Hartel (UK) Ltd v Woods and Amec Group v Law, the claimants brought unlawful deduction from wages claims, arguing that their employers should have included compulsory overtime - overtime which an employee must work if offered, but which the employer is not obliged to offer - when calculating their holiday pay. 

The EAT ruled that the Working Time Directive requires that compulsory overtime should be included when calculating holiday pay. However, it also ruled that claims for arrears of holiday pay will be out of time if there has been a gap of more than three months between underpayments. In other words, once a worker has worked for three months after taking his holiday (and assuming he is paid correctly whilst working), he loses the right to claim that he was not paid correctly for his holiday. 

The EAT construed the holiday pay provisions of the Working Time Regulations 1998 so as to give effect to the Directive. 

Leave has been given for the parties to appeal to the Court of Appeal. 

The decision is not as bad as it could have been for employers. Although they will be disappointed by the EAT’s decision that they must include compulsory overtime when calculating holiday pay, there is plenty of good news. 

First the judgment only concerned compulsory overtime - overtime which an employee must work if offered, but which the employer is not obliged to offer.  Voluntary overtime was not covered and there remain some arguments over whether voluntary overtime has to be included.   

Secondly, overtime only has to be included when calculating holiday pay in respect of the basic four week statutory holiday entitlement under the Working Time Directive. Employers do not have to include overtime when paying holiday pay for the additional 1.6 week’s holiday provided by the Working Time Regulations. Nor when paying holiday pay for any additional contractual holiday entitlement over and above the basic statutory four week entitlement. 

Thirdly, subject to a successful appeal on this point, workers will not be able to bring claims for underpaid holiday pay if there has been a gap of more than three months between underpayments. For example, if a worker takes holiday in January and April and then does not take any further holiday until August. Assuming that he has been paid correctly whilst working the months of May, June and July, he will only be able to bring a claim that he was not paid correctly for August. He will have lost the right to bring any claim for underpayment for his January and April holidays. 

What should employers do now?

Employers affected by this judgment must make a decision either to start including compulsory overtime in holiday pay (on the basis that it is unlikely that the law is going to change going forward), or if they decide not to do so (on the basis that there is still a chance that the decision will be overturned) they should at the very least make provision in their accounts for their potential liabilities should the law remain unchanged following any appeal. The same applies to commission payments, following the ECJ decision in Lock v British Gas earlier this year and to other sums intrinsically linked to tasks performed under the employment contract, such as productivity or attendance bonuses. 

There may also be advantages in starting to include overtime to limit claims for arrears, as the question of how far back claims can go may still be up in the air pending any appeal.   Employers must take legal advice on their particular circumstances.