Holiday pay: the EAT decision that overtime should be included examined

Author: Darren Newman

Consultant editor Darren Newman discusses the ruling on overtime and holiday pay in Bear Scotland Ltd v Fulton and another. While he suggests that the very narrow view of what constitutes "a series of deductions" for the purposes of back pay may not stand up to scrutiny, he considers that any appeal is unlikely to result in a different ruling on the main issue of including overtime in holiday pay calculations.

Nobody can be surprised that the Employment Appeal Tribunal (EAT) in Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others [2015] IRLR 15 EAT has ruled that a worker's holiday pay should include the amount that he or she would ordinarily earn from working overtime. The decision of the European Court of Justice (ECJ) in Williams & ors v British Airways plc [2011] IRLR 948 ECJ back in 2011 pointed in that direction and the more recent decision in Lock v British Gas Trading Ltd [2014] IRLR 648 ECJ made it inevitable.

The EAT has now confirmed that, where a worker's normal pay varies because he or she can be required to work overtime, the calculation of a week's pay for the purposes of annual leave should be based on an average of his or her earnings over the 12-week reference period that is already used for other workers whose normal pay varies from week to week.

What is surprising about this decision, however, is the way in which the EAT dealt with the issue of back pay. It was widely thought that a decision that overtime should be included in holiday pay would prompt a huge wave of claims for unpaid holiday pay stretching as far back as 1998. In this respect, however, the decision reached by the EAT is the best outcome that employers could possibly have hoped for.

It was established in HM Revenue and Customs v Stringer and others sub nom Commissioners of Inland Revenue v Ainsworth and others [2009] IRLR 677 HL that a failure to pay the correct amount in respect of annual leave under the Working Time Regulations 1998 (SI 1998/1833) amounts to an unlawful deduction from wages under the Employment Rights Act 1996. A worker can also claim for unpaid holiday pay under reg.16 of the Regulations, but there is an important respect in which an unlawful deduction from wages claim is better for the worker. A claim under the Regulations must be brought within three months of the employer's failure to pay the correct amount, whereas a claim for an unlawful deduction can be made in respect of a "series of deductions", provided that the claim is brought within three months of the last deduction to which the complaint relates (s.23(2) of the Employment Rights Act 1996). This means that a worker can bring a claim in respect of deductions that were made many months and even years earlier, provided that the deductions are part of a series and the worker has brought a claim within three months of the last deduction.

Applying this to holiday pay, the prospect was that workers would argue that, whenever they took annual leave, their employer made a deduction from their wages by failing to include overtime in the calculation. Each deduction could be seen as part of a series, so, provided that the worker brought a claim within three months of the latest in the series, the claim could go back as far as the introduction of the Regulations. A lot of apocalyptic figures were bandied about as to how much that could cost British business.

What the EAT has done, however, is to take a very narrow view of what counts as a series of deductions. Essentially Mr Justice Langstaff held that two deductions cannot be part of a series if they are separated by more than three months. This is based on the observation that, once a period of three months has passed after a deduction, the ability to claim for it is normally lost. It could not have been the intention of Parliament, he says, for the tribunal to regain jurisdiction simply because the employer has at some later stage made a similar deduction.

This means that workers will be able to claim back pay only in respect of underpaid holiday if they have consistently taken annual leave in each three-month period. A worker who took holiday in December, and whose next period of leave was in May followed by another period in September would not be able to claim that the three deductions formed part of a series.

This is an elegant piece of reasoning, which has allowed the EAT to interpret the Working Time Regulations 1998 so as to comply with the Working Time Directive (2003/88/EC) without prompting a wave of mass litigation. It allows employers to adjust holiday pay in the future without having to settle claims going all the way back to 1998, except in those rare cases where a worker will not have gone more than three months without taking any annual leave.

However, the fact that the EAT's reasoning is elegant does not mean that it is correct. The idea that the deductions in a series cannot be more than three months apart is a novel one. The EAT's interpretation is not based on any particular provision of the Employment Rights Act 1996 or on previous case law, but reflects what Mr Justice Langstaff refers to as the "sense of the legislation". Leave to appeal on this issue has already been granted and it is difficult to predict how the Court of Appeal will deal with it.

In the meantime, what should employers do? I think that there is little point in hoping that the Court of Appeal will take a different view on the central issue of including overtime in the calculation of a week's pay. I also think that there is not much point in drawing distinctions over the kind of overtime to be included. Technically this decision applies only to overtime that the employer can insist that the worker perform. It does not extend to purely voluntary overtime where the work may be offered but the worker can choose whether or not to work it. However, the direction of travel is clear, and it seems to me that overtime is part of a worker's normal pay whenever it is worked regularly, irrespective of how much choice the worker has in the matter.

Where a worker's total pay varies from week to week or month to month - whether because of overtime, commission or other allowances or payments relating to work - holiday pay should take account of that variation by being based on an average. The calculation set out in the Employment Rights Act 1996 gives a 12-week reference period, but in some workplaces where the amount of work available is seasonal we may see a tension between workers who want to take annual leave immediately after a busy period and employers keen that annual leave is taken before the busy season to keep the costs lower. In those cases, a 12-week average period may be problematic. The ECJ in Williams held that workers were entitled to a calculation based on a "representative" reference period, and where the level of work varies through the year it might be better to use a longer averaging period, even as long as 52 weeks in some cases.

The Government has announced that it has set up a task force to look at how it can limit the impact of the EAT's decision on business. Its options are frankly limited and the EAT has already curbed the impact more than anyone really expected. However, employers should not have to wade through case law to understand their obligations. One useful step that the task force could take would be to come up with a new definition of a week's pay that is easily understood and applied. How hard can that be?

perspective@xperthr.co.uk