Unfortunately the decision does not provide any guidance on the method for calculating statutory holiday pay to take account of non-guaranteed overtime and allowances.
Employees who work non-guaranteed overtime will need to receive different holiday pay, depending on whether they are taking their minimum four-week leave or their additional 1.6 weeks’ leave. It is simple to see the administrative challenges this will create for employers.
Furthermore, employers will need to calculate employees’ average pay in order to calculate the amount of a week’s pay for the purposes of statutory holiday pay.
The Employment Rights Act 1996 refers to a 12-week reference period. However, it is now not clear if that is the appropriate reference period to comply with the Working Time Directive if it is not considered to be representative. It may be that an appropriate reference period will need to be determined on a case-by-case basis.
It is possible that more light will be shed on this issue in February 2015.
The Unite union, which represents the claimants in the cases of Hertel (UK) Ltd v Woods and others UKEAT/0160/14 and AMEC Group Ltd v Law and others UKEAT/0161/14, has announced that they will not be appealing the EAT’s decision.
This means that, in most cases (and subject to any appeal by the employers), workers claiming underpaid holiday pay will not be able to bring claims stretching back many years. Non-guaranteed overtime must be taken into account in calculating statutory holiday pay derived from the Working Time Directive, but limited the extent to which workers can make retrospective claims for underpaid holiday.
Prior to the decision, employers had been concerned that retrospective unlawful deduction claims for underpaid holiday could go back to 1998. This means that workers will not be able to bring claims based on a series of deductions where there has been a gap of more than three months between the deductions. In a recent landmark case the EAT considered whether non-guaranteed overtime must be taken into account in calculating statutory holiday pay. If so, the extent to which workers can make retrospective claims for underpaid holiday.
The EAT held that payments for overtime which a worker is required to work but which an employer is not required to offer (non-guaranteed overtime) is “normal remuneration” for the purposes of Article 7 of the Working Time Directive, and the Working Time Regulations 1998 (WTR 1998) must be interpreted to achieve this.
Therefore, non-guaranteed overtime should be taken into account when calculating holiday pay for the purposes of the minimum four weeks’ statutory annual leave required by the Directive (set out at regulation 13 of the WTR 1998). This does not apply to the additional 1.6 weeks’ leave provided by regulation 13A of the WTR 1998 which remain subject to the “week’s pay” provisions of the Employment Rights Act 1996 under which only compulsory, guaranteed overtime is taken into account in respect of workers who work normal hours.
The EAT held that workers cannot use each shortfall in holiday pay as part of a series of deductions (for the purposes of unlawful deductions claims) where a period of more than three months has elapsed between the deductions due to the fact that the additional 1.6 weeks’ leave does not have to include non-guaranteed overtime, this may mean that it is easier to show a break in the series of deductions of more than three months because the additional leave will be paid at the correct rate.
This decision confirms that overtime which a worker is required to work but which the employer is not obliged to provide must be taken into account in calculating statutory holiday pay in respect of the four-week minimum leave entitlement under regulation 13 of the WTR 1998. Allowances which are directly linked to a worker’s work and are more than merely expenses must also be included.
Going forward, employers will be required to include such overtime payments and allowances in statutory holiday pay for the first four weeks’ of annual leave. This will surely result in a huge increase in payroll costs as the majority of employers do not currently include these variable pay components in holiday pay. The manufacturers’ organisation, the EEF, has stated that two-thirds of its members estimate that the change to holiday pay calculations will add more than 3% to their current payroll costs, while two out of five anticipate an increase of at least 5%.
Employers will need to review their staff’s working arrangements to assess whether they have workers who regularly work non-guaranteed overtime or are paid allowances which are more than simply expenses. There is then a decision to be made about whether to “bite the bullet” and start including these elements of variable pay in holiday pay straight away or await any appeal of the EAT’s decision on this point.
As far as historic liability is concerned, the EAT’s decision appears to severely limit the scope for workers to bring backdated claims for underpaid holiday.
That being said, the decision leaves major practical questions unresolved.
