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Overtime must be included in Holiday Pay

Rebecca Roberts explores the implications of Bear Scotland Ltd & Ors -v- Fulton & Ors (Working Time Regulations : Holiday pay) [2014] UKEAT 0047_13_0411 (04 November 2014)
26 November, 2015

Rebecca Roberts explores the implications of Bear Scotland Ltd & Ors -v- Fulton & Ors (Working Time Regulations : Holiday pay) [2014] UKEAT 0047_13_0411 (04 November 2014) a case which has significant effect on the calculation of holiday pay entitlement .

A piece this month in the Chartered Management Institute reads “Bosses at small and medium sized enterprises add £22 billion to the UK economy by working overtime according to as new report from digital lender Everline and Centre for Economic and Business Research (CEBR).” 

Wages are often the single greatest regular expense for any business and decisions like this will have serious consequences. 

The EAT held that payments for overtime which employees are required to work, (but which their employer is not obliged to offer) are part of normal remuneration.   This means that this overtime pay ought to be included as such in the calculation of pay for holiday leave. 

In the same case it was clarified that taxable remuneration for time spent travelling to work did not fall within “normal remuneration” for the purpose of calculating holiday pay.  

Definition of a week’s pay 

Holiday pay is calculated by reference to two core concepts of a week’s pay and the definition of normal pay. Where an employee has normal working hours, calculation of the weeks’ pay is straightforward. Where there are no normal hours it is calculated by reference to an average over the past 12 weeks. 

What is likely to be included in the definition of normal pay for the purposes of the Employment Rights Act includes payment for regular overtime, as well as other elements of pay that regularly make up a wage packet, such as commission, including “non guaranteed” overtime.  Non guaranteed overtime is overtime which employees are required to work if asked to by their employer. Voluntary overtime falls outside of this scheme unless it is sufficiently regular and usual.

If you pay overtime or commission to employees regularly and which is sufficiently regular and usual, then you will need to recalculate your liability.  A helpful way of thinking about it is that employees should receive the same average pay when they take holiday as they do when they are working.

How much overtime is included?

Employees are entitled to a minimum of 5.6 weeks’ annual leave each year which includes public and bank holidays.  This increase in holiday pay will only affect four out of those 5.6 weeks.  It follows that public and bank holidays are still paid without reference to overtime just as before.

How to calculate holiday pay in accordance with this decision

Holiday pay should be calculated by reference to a normal week’s pay.  Generally if workers are paid a set amount of overtime each week then this should be added to the week’s pay for holiday pay purposes.  Overtime which is truly voluntary can be discounted. 

Where the pay fluctuates week by week, due to differing levels of overtime, employers should take an average of the last 12 weeks’ pay when determining a normal week’s pay for holiday pay.

Can employers be sued for retrospective holiday pay?

The EAT has clarified that workers can only claim for retrospective holiday pay where  there has been less than three months between the last underpayment and the claim being brought, and where there is a series of deductions, with less than three months between each deduction.  This will in practice severely limit any employees wishing to make such claims retrospectively.

Until the decision is overturned businesses need to carefully consider how best to address this potential cost burden sooner rather than later.   At Ronald Fletcher Baker we take time to understand your business and what you want to achieve and together with your management and accounting teams are able to provide you with commercially viable solutions that best fit your needs.

For enquiries or questions contact Rebecca Roberts on 0207 467 5763.