Implications of the holiday pay ruling

The Employment Appeal Tribunal (EAT) held on 4 November 2014 that holiday pay must reflect an employee’s ‘normal pay’ – which will include overtime in certain circumstances.  It is thought that this will affect around 5m employees.

What is included in the calculation?

The judgment was concerned with ‘non guaranteed’ overtime – that is, overtime which the employee is required to work but which the employer is not obliged to provide.  The EAT held:

  1. as long as the non guaranteed overtime is normally worked (i.e. that it is worked sufficiently often to justify the label ‘normal’), it should be included when calculating holiday pay under the Working Time Directive (WTD); and
  2. the Working Time Regulations (WTR) can be interpreted in such a way as to give effect to this provision, which means that both the public and the private sector are immediately caught by the ruling, without any need for a change to the current legislation.

The EAT also held that travel allowances (which compensate an employee for their travel time in addition to their expenses outside normal working hours) should be taken into account when calculating holiday pay.

However, the news for employers is not all bad.  The judgment only extends to the treatment of holiday pay payable under the WTD (4 weeks per year).  The additional 1.6 weeks’ holiday available under the WTR are not caught, nor are contractual holidays in excess of the minimum required by legislation.  While most employers will probably decide not to make a distinction between types of holiday due to the additional administrative burden this will put on them, the distinction is helpful in relation to backdated claims (see below).

Backdated claims

There had been widespread fears that a decision allowing overtime in the calculation would give rise to enormous numbers of claims for backdated holiday pay – potentially stretching back to the last century, when the WTR came into force.  The EAT has held that if no deduction has been made in the previous three months, a claim for holiday pay will only succeed if the claimant can pass the difficult test of showing that it was not reasonably practicable to bring the claim in time.  In other words, if the worker doesn’t take WTD holiday during a three month period, the series will be broken and they will not be able to backdate their claim.  As the EAT also held that the worker is not entitled to designate which holiday will be WTD holiday as opposed to WTR or contractually enhanced holiday, this is significant as it effectively neutralises the risk that employees will be able to bring substantial backdated holiday claims.

Likely reaction

We expect to see employers monitoring overtime more closely to ensure that employees are not accruing large amounts shortly before going on leave.  They may start to revise their overtime rules, or adjust pay rises in the future to allow for the additional expense this decision may cause.

Ongoing uncertainty

Employers should take comfort from the way in which the EAT dealt with backdated claims, but should note that the case leaves some questions unanswered – for instance, it may be possible that employees could bring breach of contract claims in relation to backdated holiday pay (but this is far from certain), and it is not clear if the decision extends to situations in which the overtime is entirely voluntary.  In any event, it has been appealed to the Court of Appeal.  This appeal, together with a decision relating to commission expected in spring next year, means the issue is far from resolved.  Normal service may not resume any time soon.

If you have any questions about how this will affect your business, please contact Joanna Blackburn.