It’s not often that a development in employment law is the leading national news story but that scenario certainly arose this week. The Employment Appeal Tribunal in England ruled in the cases of Bear Scotland v Fulton, Amec v Law and Hertel v Wood that employees who work overtime should have their holiday pay calculated based upon their average weekly earnings – to include overtime.
The Claimants won their cases before the Employment Tribunal and the decision of the Employment Appeal Tribunal has been pending for some time. The decision is not surprising. It follows another recent decision that provided that employees’ whose remuneration includes payment of commission (for instance on sales) should have their commission payments taken into account when calculating holidays.
Traditionally, employers have paid employees’ their holiday pay at their basic rate of pay, without taking into account overtime worked or commission earned. In light of these rulings, employers are going to have to consider changes to their approach. Unfortunately, the position is not yet settled because there are indications that the employers in the cases referred to above may lodge an appeal with the Court of Appeal. However, unless the decision is overturned on a further appeal, it seems that the law now requires employers to take into account an employee’s total average earnings, rather than simply pay basic pay during a period of annual leave.
Clearly having to pay employees at a higher rate of pay during periods of annual leave will impose an increased burden on employers. However, the decision appears logical when analysed. The purpose of allowing employees to receive paid annual leave is to allow for a much-needed rest from work and time of refreshment. Employees benefit from time away from work and, as a result, are less likely to become fatigued, burnt out, stressed and absent from work on sick leave.
Because of the obvious health and lifestyle benefits of time off work, the law does not allow employers to incentivise employees to refrain from taking their full annual leave entitlement. This is why an employer can only make a payment in lieu of holidays accrued but not taken at the end of the employee’s employment and not during the employment. Employees, especially low paid employees, who rely on overtime and commission to “top-up” their wages to a level at which they can afford to live, are disadvantaged if they are only paid their basic rate of pay during time off work. These recent decisions seek to put employees in no worse a financial position for having taken annual leave than if they had not taken annual leave. As a matter of public policy, it seems a sensible decision, even if it isn’t good for the bottom-line of the business.
Employers would be wise to review overtime worked in their organisation. The potential for increased costs as a result of overtime being included in holiday pay means that a review of working practices to see if overtime is being kept to a minimum would be in order. Further, if there are particularly busy times of the year when overtime is a more regular feature, employers may wish to consider curtailing employees’ ability to take annual leave during that busy period, if this is practical.
One of the quirks of the decision is that it gives effect to a European Directive that only requires employees to receive 4 weeks’ annual leave per year. In the UK, the entitlement is to 5.6 weeks so it would seem, on the face of it, that the requirement to include overtime in holiday pay may be limited to the first 4 weeks’ annual leave in a year. Administratively, this may be difficult to keep on top of and it may be that the law moves to require the additional 1.6 weeks’ annual leave to be calculated in the same way as the first 4.
Finally, there has been a lot written in the media about the potential for these decisions to cost UK businesses billions of pounds in back-dated claims from employees who will seek to take advantage of these decisions. The government has set up a task-force to analyse the impact of the decisions of the appeal tribunal and intends to try to limit the impact of the decisions. The Tribunal points out that claims could only be back-dated if there were no more than three months between what are now viewed as underpayments of holiday pay. While it appears that employers will have to include overtime in holiday pay going forward, the chances of claims going back several years appear slim.
This case is a significant development in employment law. This article is intended only as a brief guide and not as legal advice. For specific advice on your situation, please do not hesitate to get in touch.