Holiday Pay and Overtime - What Does It All Mean?

A legal decision handed down on Tuesday 4 November on the meaning of holiday pay will have a seismic effect. The case concerned the meaning of a week's pay for the purposes of the Working Time Directive (WTD). The case was regarded to be of such importance by the Government that the Secretary of State intervened and was represented. Essentially the employers and the government's arguments were dismissed. The Employment Appeal Tribunal (EAT) ruled:-

1. The whole purpose of calculating a week's pay for the purposes of holiday pay is to provide workers with a minimum guaranteed amount of annual paid holiday. This should be normal pay.

2. Importantly in this case although the employers were not obliged to provide overtime, workers were obliged to work it. The case of Lock v. British Gas Trading Limited (about which we have already written) concerned similar arguments on commission and was relevant. Commission was directly linked to the worker's normal pay. So, overtime, shift allowances and other pay are directly linked to normal pay.

3. Holiday pay must correspond to normal pay so that workers are not disadvantaged by exercising their right to paid leave under the Working Time Regulations.

4. There is a "temporal component" to what is normal. "Payment has to made for a sufficient period of time to justify that label". In this case working patterns were settled and overtime should therefore form part of normal pay for calculating holiday pay.

5. There was no need for Parliament to amend the Working Time Regulations. They could be read in such a way to allow this decision to take immediate effect.

6. The time limits within which workers can claim back payments should be interpreted narrowly.

7. The revised calculation for holiday pay affects pay in lieu of notice payments.

8. Both sides have permission to go to the Court of Appeal in view of the public importance of the decision.

THOUGHTS ON THE CASE

• The government are launching an urgent task force to consider the implications for British business. This may strike at the heart of the ability of businesses to be flexible and to compete in respect of demand surges.

• The BBC have estimated that approximately 5 million workers do voluntary or compulsory overtime. A recent survey of the federation of small businesses found that a third of small businesses have staff who do voluntary overtime and up to 400,000 firms could be affected.

• Many claims issued in the Employment Tribunals have been stayed awaiting this decision and it remains to be seen how quickly the Court of Appeal will hear the case if the parties decide to appeal. Stays on cases may now be lifted. We will see a flood of claims.

• Importantly, until and unless the Court of Appeal rules, this is the current status of the law. Employers should monitor any updated guidance from the BIS. Please let us know if you would like to be specifically updated with further developments.

• It is important to appreciate that the ruling affects the minimum statutory paid annual leave and that is distinct from any additional contractual leave provided by employers.

• In the first instance employers should calculate what normal overtime is likely to be in their business amongst pools of workers and should prepare calculations based upon the effects of additional holiday pay and any additional increments going forward back over, say, the last 3 months.

• It is likely that this will lead to a decrease in overtime arrangements in some businesses; to pay freezes and to urgently renegotiated pay settlements. It has been said in some quarters that some businesses may not survive this ruling.

for any more information or to be added to our database of employers who wish to be kept up to date on developments, please email [email protected]; or the other members of our employment team [email protected] and [email protected].