Guidance and Advice on the EAT court ruling on overtime and holiday pay

Overtime and Holiday Pay Ruling -  04 November 2014

1.   Introduction
The Employment Appeal Tribunal (EAT) has ruled (4th November 2014) that when employers are calculating "pay" for the purposes of paid holiday entitlement for those workers undertaking their 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 important case appears to have stark implications for employers; with many companies already speculating about the prospect of increased payment and tax obligations relating to holiday payments for many staff.  However, a note of caution about these fears should be sounded since

1.       The scope of the ruling is limited to certain types of overtime
2.       Strict time limits have been laid down in respect of backdated claims and
3.       The ruling is now going to be appealed to higher courts

This briefing sets out:
  •       The UK and European Legal Framework from which the judgement arose
  •        Profiles the judgement itself and three important caveats around it 
  •        Considers the implications for employers

This latest EAT  decision illustrates once again that employment and equality definitions as well as the scope of  rules and regulations are always changing and can have an huge impact on the modern world of work.

All employers should ensure their HR teams, senior and operational managers receive regular training on employment law and good practice.  

Ultimately the cost of training is minuscule relative to the cost and burden of disputes, tribunals or litigation. 

In recent months there has been a series of other new developments impacting upon the workplace. These have included:-
•    An extension of the definition of Disability to include “morbid obesity”
•    Decisions by tribunals to include new concepts under “Religion and Belief” such as beliefs in:
o   public service
o   democratic socialism
o   anti-fox hunting”
•     Greater rights to request flexible working arrangements
o    that go way beyond applications from those with caring or family responsibilities
          New powers for courts to order company wide equal pay audits going beyond the boundaries of one individual case
          Tough new European regulations on Data Protection which will be introduced in 2015 to 2016

All types of “breaking legal and political news” are covered in our employment, and equality and training courses. 

In preparation for the 2015 General Election, all the political parties have now unveiled a huge raft of new proposals to further change UK employment and equality laws.   

Concrew Training's workshops on “employment law” ,  “equalityand diversity” "equality and diversity for museums" and “avoiding workplacedisputes” cover these and enable HR specialists and Managers to maintain a current ad practical understanding of the latest requirements.   All business and Organisations can benefit from providing refresher training on HR legislation annually.  

2.   The UK & European Legal Framework for the Holiday & Overtime RulingUnder Article 7 of the European Union (EU) Working Time Directive, full time staff are entitled to a basic four weeks' paid holiday each year. This is called Regulation 13 leave. The new EAT judgment only applies to this 4 weeks of a worker's annual leave – in other words, the basic amount of leave required under the EU Working Time Directive.

In the United Kingdom the Working Time Directive has been implemented under the Working Time Regulations which allows for a further 1.6 weeks of additional annual leave. This is called Regulation 13A or Additional Leave. The new EAT judgement does not apply to this further 1.6 weeks of additional leave or indeed to any further contractually enhanced annual leave.

In summary therefore, it is clear from the EAT judgement  that the requirement to include certain non-guaranteed overtime in holiday pay only applies to the four weeks' holiday pay entitlement which as mentioned above derives from the  Regulation 13 holiday entitlement.  

The additional 1.6 weeks paid holiday that UK employees are entitled to under the Working Time Regulations 2008 (Additional Leave) does not need to include an amount for non-guaranteed overtime.

3. The Holiday and Overtime Judgement – Three Important Caveats
Arising from  the first wave of quite extensive and on-going  publicity on the EAT ruling, there has been consistent speculation that the judgement will now result in complex, backdated claims costing  companies millions of pounds. However, there are three important caveats that have been overlooked in the media frenzy:-

Firstly, leave has been granted to take the case to the Court of Appeal, and therefore the issue will now remain unresolved for some time longer. From there, it may even go to the Supreme Court or European Court. Experts are already predicting a substantial time frame ahead before a final decision is handed down.

Secondly, it is not the case that all forms of variable remuneration now need to be taken into account when considering holiday pay. Discretionary pay, such as bonuses, is still not part of “normal pay.” It follows from this that when overtime, commission or related variable pay is not a normal pattern of remuneration, it will be unaffected by the EAT ruling.

Thirdly, the EAT decision also included a clear interpretation of the legalities surrounding the actual time limits for claims from staff  who believe they  are affected by the judgement and entitled to extra payments. Claims for what would be regarded as an unlawful deduction from pay have to be made within three months of the deduction or the last of the “series of deductions.”  

The EAT were careful to define this latter point. A series cannot include different holidays taken more than three months apart over several years. Each holiday, if taken more than three months after another, will form a separate deduction or series in itself. 

This is an important factor. In layperson’s terms it means that if staff have taken and been paid for holiday more than three months ago they would have no claim. A claim is limited strictly to that holiday only, unless they have taken another vacation within the three months prior to the last one –usually unlikely in the normal scheme of things.

4. Implications for Employers Any action taken by employers should pay due regard to the caveats set out in 3 above

The immediate obvious implication of the EAT judgement is that the 4 weeks’ leave required by the Directive (Regulation 13 leave) and the additional 1.6 weeks’ leave provided by the WTR ( Regulation 13A leave) are to be paid at different rates.

This will cause some red tape headaches for employers’ .The Coalition Government in the wake of the judgement have set up a review of 13 and 13A and hinted that they may seek to remove the distinction between the two Regulations. 

But stark political realities suggests that this is very unlikely to be a legislative priority before the 2015 election.

Employers will therefore need to decide in the short term whether to pay the holiday at different rates or equalise up to pay all leave at normal remuneration, notwithstanding the caveats in 3 above.

Some companies have indeed already indicated, notwithstanding the caveats in 3 above that they are now going to start including overtime that can be construed as "normal pay" in future holiday remuneration. However, it must be stressed that in respect of 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 this time limitation issue and consider their action accordingly.

A further consideration is that some Unions had already filed a substantial number of claims for underpaid holiday pay, which have been stayed pending the outcome of the appeal cases before the EAT. 

The decision of the EAT may now provide a pragmatic incentive for employers to settle claims, as the potential for back pay is now limited.

In the longer term, ACAS and others are advising that employers should consider a review of their working arrangements in order to minimise the increased liability for holiday pay. 

Options already being canvassed by experts might include:
  • Offering voluntary overtime instead of non-guaranteed overtime
  • Using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime
  •  Revising commission plans to schedule payments at a time which impacts less on Regulation 13 leave and preventing leave from being taken at certain times of year.

5. Summary
Clearly the whole subject of holiday and overtime remains complex and there is no one-size fits all definitive way forward.  Concrew Training recommend that business and organisations who may be affected by the ruling commission Concrew Training to facilitate a training event for HR and Senior Management that updates all on the latest and pending issues facilitates identification the specific policies and approaches that will deliver optimum results for their business or organisation

Concrew Training
07 November 2014




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