Why holiday pay has to include overtime

What has struck me most about some of the commentary on the EAT decision in Bear Scotland Ltd v Fulton (and other cases) on overtime and holiday pay has been the way in which it is assumed that the exclusion of overtime from holiday pay is perfectly natural and logical and its inclusion is a surprising and strange requirement imposed by Europe. Take this comment from Adam Marshall of the British Chambers of Commerce, as quoted in the Telegraph:

“This expanded definition of ‘pay’ is so ludicrous that the government itself has argued against it. No business should have to pay more than base salary during holiday periods, unless they elect to do so,”

Or look at what the Independent quotes John Cridland of the CBI as saying:

“This is a real blow to UK businesses now facing the prospect of punitive costs possibly running into billions of pounds – not all will survive, which could mean significant job losses.”

Punitive? As in ‘inflicted or intended as punishment’? Really?

The truth is that it is the exclusion of overtime that is difficult to justify rather than its inclusion. The problem has been caused by the way in which the Working Time Regulations adopted a definition of a ‘week’s pay’ that was never designed to be used in this context.

Government lawyers do not like reinventing the wheel. So when faced with having to include a right to paid annual leave in the Working Time Regulations 1998 they were happy to use the existing definition of a week’s pay set out in the Employment Rights Act 1996.  For those who haven’t already had to – have a go at actually reading those provisions. The meaning doesn’t exactly leap out at you does it? The drafting is hardly a model of simplicity and clarity.

‘Week’s pay’ – a potted history

This definition has been through the mill a few times. The current version is derived from the Employment Protection (Consolidation) Act 1978, which in turn took it from the Employment Protection Act 1975 (schedule 4 for the enthusiasts amongst you). However it has its origins in the Contracts of Employment Act 1963, which first introduced a right to a minimum period of notice. Schedule 2 of the Act provided that an employee was entitled to be paid during the notice period if he or she was off sick, not provided with work or absent on contractual leave.

The schedule divided employees up into those with and those without ‘normal working hours’. Those without were entitled to be paid based on a 12 week average and those with normal working hours were paid the amount they would have received had they worked those hours (with another averaging provision for piece workers). That is pretty much the same method of calculation we find in the Employment Rights Act today

Paragraph 1 of the schedule  specified that those who earned overtime pay when employed for more than a fixed number of hours in a week were to be treated as having normal working hours. It then provided that those normal hours should be taken as excluding hours of overtime unless they were actually part of the minimum number of hours the employee was required to work. The effect of that was to ensure that an employee who had been dismissed or had resigned  – and was in his or her period of minimum statutory notice – would only be paid basic pay, excluding overtime, in any week when he or she was not offered work, was absent, or was taking contractual leave.

Paragraph 1 is now to be found, with only minor amendments, in s.234 of the Employment Rights Act 1996. When the Government used the existing definition of a week’s pay when implementing the Working Time Regulations, therefore, it also incorporated this provision, designed to be used only as the employment relationship was ending.

The exclusion of overtime when calculating holiday pay is therefore based on an archaic definition of a week’s pay which was intended to apply to a completely different set of circumstances more than half a century ago. While it makes perfect sense to limit the pay of an employee who has already been given notice and is not working, it makes very little sense to apply the same limitation to holiday pay while the relationship is alive and ongoing.

No point acting all surprised about it

But even if you don’t accept that, it is the Government’s job to implement directives properly and the need to amend the law has been apparent since the Williams v British Airways decision in 2011. In fact we can probably say that the need to reexamine the definition of a week’s pay was made clear by the ECJ in the Robinson Steele case back in 2006 where the court said:

49. The holiday pay required by Article 7(1) of the directive is intended to enable the worker actually to take the leave to which he is entitled.

50 The term ‘paid annual leave’ in that provision means that, for the duration of annual leave within the meaning of the directive, remuneration must be maintained. In other words, workers must receive their normal remuneration for that period of rest.

By any sensible definition, if an employee normally receives basic pay plus overtime then his or her normal remuneration  must include overtime.  As Mr Justice Langstaff says in the Bear Scotland case:

44. Despite the subtlety of many of the arguments, the essential points seem relatively simple to me. “Normal Pay” is that which is normally received.

Quite.

So there is nothing ludicrous in the EAT deciding that overtime needs to be included in the calculation of holiday pay. Employers should instead be grateful that the EAT found such a creative way to prevent employees who have been underpaid in terms of holiday pay for the past 16 years from claiming back pay (that’s a whole other article). What would be ludicrous however would be to leave the current definition of a week’s pay in place and just expect employers to read up on the case law.

Vince Cable, it seems, has set up a task force to look at how to limit the impact of the decision. There isn’t much that can be done to be honest. I know hardly anyone who thinks that the EAT was actually wrong in the way in which it interpreted the directive and an appeal on that point is highly unlikely to succeed. Short of renouncing the Working Time Directive and leaving the EU altogether (that’s an issue for next year) we are stuck with including overtime in holiday pay. What the task force can usefully do, however, is look at a new definition of a week’s pay that can be clearly understood and which complies with the directive. How hard can that be?

 

 

About Darren Newman

Employment law consultant, trainer, writer and anorak
This entry was posted in EU law, Working Time and Annual leave and tagged , , , , , , , , . Bookmark the permalink.

11 Responses to Why holiday pay has to include overtime

  1. Chris says:

    Darren,
    Interesting piece. However, I wonder if all overtime should be considered normal pay. Granted where a person is contracted to work say 10 hours but is regularly asked to work additional hours every week, then morally there is a clear argument about what is normal. One would question the nature of the contract and that the employee should request to have this extended to reflect the reality (although maybe this is too much to expect of the powerless employee).

    However, what about where the requirement is not a weekly experience, but more intermittent, or only prolonged at certain times of the year (e.g. finance at year end; grounds workers during the summer). Is that a normal week?

    If the principle of the 12 week average is deemed to apply – will this result in a clammer for staff to take leave during, or soon after high peak work periods to increase their normal weeks pay, potentially placing the operations at risk. Likewise, might the employer reaction be to not allow leave within 12 weeks of having worked excess overtime to control costs?! Surely this is not in the interest of the powerless employee.

    I also wonder how easy it is to distinguish between being required to work – so part of the normal week, or an employee offering/volunteering to work beyond their normal week. The semantics of whether overtime is required and therefore normal can sometimes be difficult.

    Finally, the focus in the media appears to only be on overtime – what about other regular payments. Our organisation pays disruption payments for people working at the weekend or on a night shift. Where rotas are scheduled it can be easy to anticipate what would have received when on leave – however, where there is no regular pattern and these rates are claimed based on the hours worked week to week this becomes more problematic. Again 12 week averages if they are the way forward can be used, but in reality the pay system will not know they are on leave to pay this, and the fact is that by being on leave, they have not experienced the disruption of working nights etc. so the moral argument is a lot weaker.

    • Hi Chris

      Thanks for commenting

      The cases before the EAT all concerned overtime that was reliably and consistently worked and I quite agree that there is an issue where the overtime is just intermittent. The requirement seems to be that the overtime has a degree of permanence as a feature of the employee’s pay, but none of the cases have been clear about how regular it needs to be to count as ‘normal’.

      I think the easiest way is simply to accept that even irregular overtime should be included in the average. That is not a perfect solution because as you say there will be a tension between the employee wanting to take holiday immediately after a busy period and the employer wanting it to come after a quiet period.

      Perhaps the problem could be solved with a much longer reference period. We are stuck with 12 weeks at the moment because that is what the ERA gives us, but in Williams the ECJ talked about a reference period that was representative. Maybe where overtime varies through the year you could use a 52 week average to calculate holiday pay.

      I agree with you about the voluntary / required problem. I don’t think it makes sense to exclude voluntary overtime from the calculation. This case is not quite authority for doing that, but I really don’t see much of a logical distinction between the two and in many cases it will be hard to distinguish between voluntary and contractually required overtime.

      As for other payments it is worth reading the last part of the EAT decision – which we have all neglected so far – because it talks about travelling allowances and how they need to be included in the calculation if they exceed mere expenses. The argument about not experiencing the disruption does not really work because after all in Williams the pilots were entitled to flying allowances when on annual leave even when they weren’t flying. All holiday pay is a payment for an inconvenience (work) which you are not actually experiencing. To be honest, it sounds to me like your workplace should be paying on the basis of a 12 week average in any event – although I obviously don’t have all the details.

  2. Paul Murphy says:

    Really good piece. Why did the Government lawyers use an archaic definition of a week’s pay when drafting the WTR, I wonder? An error or a deliberate attempt to frame the rules in favour of industry? Or is that too cynical?

    My real query for you, Darren, is about the limitation of retrospective claims. Could this point be appealed?

    • Hi Paul

      I really don’t think there was anything deliberate about it. They needed to define a weeks pay and there was already a definition in place that no-one objected to. The difficulties of variable pay really weren’t top of anyone’s agenda at the time as we were too busy worrying about night work, rest breaks and the 48 hour week.

      As for an appeal – the limit on backpay is very appealable. In fact the EAT gave permission to appeal in the decision itself which is quite unusual. Whether the union chooses to appeal or not, we will have to wait and see.

      D

  3. Henry Scrope says:

    Thanks Darren – an excellent summary and take on the position if I may say so. The historical perspective is fascinating, especially to one who is sufficiently antique to remember the 1963 Act being passed. One thing which amazes me is that the government’s press release re setting up a task force to consider the implications of the (I would have thought inevitable) EAT ruling you discuss implies (i) that the ruling came as something of a surprise to the government and (ii) that they think they may be able to legislate to change the result. Why else would their press release explain that “The government has previously argued that overtime should not be included in holiday pay”? Could it be perhaps that setting up a task force is simply a knee-jerk gesture intended to suggest to businesses that the government is on their side, especially as a general election is not far off. Or do you think there could be more to it than that? What can a task force on this actually do other than suggest tinkering with relatively insignificant details?

    Regards, Henry Scrope

  4. Hi Darren,

    A very interesting contribution from you on calculating holiday pay. You say that “the limit on back pay is very appealable.” I agree. Paragraph 79 of HHJ Langstaff’s judgment says that “Whether there has been a series of deductions or not is a question of fact: “series” is an ordinary word which has no particular legal meaning” and no authorities are cited on this issue. However, there are two reported cases on the meaning of a series of deductions. Firstly, Taylorplan Services Ltd v. Jackson [1996] IRLR 184, EAT, and Group 4 Nightspeed Ltd v. Gilbert [1997] IRLR 398, EAT. HHJ Clark in Taylorplan sets out in paragraph 18 six questions that an Employment Tribunal must ask itself when dealing with a limitation point under the Wages Act. Taylorplan was followed in Group 4 Nightspeed and paragraph 17 is particularly interesting on the issue of a series of deductions from commission due and payable, e.g. Lock v. British Gas Trading Ltd.

    Regards, Gary Morton.

    • Hi Gary

      Thanks for commenting. I don’t have access to IRLR and rather infuriatingly Bailii seems to have the result of a preliminary hearing in Gilbert but not the full decision. Could you paste in the paragraph you’re talking about. From what i can glean Gilbert concerned quarterly commission payments so they are right on the cusp of a 3 month gap.

      Really the more i think about it the more it seems clear that you simply can’t make up a rule like that without some basis in the words of the statute. I agree that whether something is part of a series must essentially be a question of fact for the Tribunal. However, I can’t help feeling that the Court of Appeal would find it quite an attractive solution.
      D

  5. Gerry Devine says:

    Hi Darren,

    Great piece, thanks for sharing it. Given the state of the economy and the austerity measures currently in place, do you think local authorities will avoid paying out to staff or take measures to ensure any payments made are minimal?

    • Hi Gerry

      Thanks for commenting. I think that all employers will do the least they possibly can to comply with the law as it now stands. I doubt any will voluntarily pay back pay. If i were them I would leave it for individual employees to make their own case. It is for the worker to identify the deductions that have been made and when – If I were an employer I would not volunteer to do that work for them.

      An interesting question will be the extent to which employers hold out when it comes to voluntary and irregular overtime. I suspect we may need to see a further case dealing with those issues

      D

  6. The Bear Scotland case is, if it could be put in these terms, less unlawful than the Bamsey case, which it may have replaced – may have replaced it because Bear is an EAT case whereas Bamsey was Court of Appeal and therefore strictly Bear could not it fact over-rule Bamsey.

    It is less unlawful because the Bear Scotland case is still at odds with what is now the Equality Act and the Part-Time Regs. This is because the case does not pay average pay, but, it pays average pay for the first 20 days of holiday, but only pays hours stipulated in the contract for the remainder of the year, which might be considerably less that average pay.

    Therefore, Bear (as was Bamsey) is discriminatory of part-timers (and females, because more females work part-time) because if a part-timer was contracted to work, let’s say, 5 hours per week, but ended up working an average of 40 hours per week, then their holiday pay would be less than the full-timer contracted to work 40 hours. The part-timer would be paid 40 hours when on holiday for the first 20 days and 5 hours pay when on holiday for the rest of the year. The full-timer would always be paid 40 hours pay when on holiday. The reason for this difference would only be because of their part-time contract and would therefore be unlawful.

    The judges in Bamsey and Bear have effectively broken the law and where able to do so because they have mis-applied ERA 1996. The ERA is easily read to allow for average pay to be paid, see s.224.

    The above argument was the basis of an appeal I made to the EAT in 2010. However, I won my claim on the construction of the contract, the judge agreeing with me that my argument against Bamsey appeared to have merit, but as we were not in the Court of Appeal, and as I had won my claim, she could not give me permission to appeal on a hypothetical. And that is as far as it went.

    The above argument has now been presented to the EU Commission, which agrees with me that the UK is in breach of EU law, we are awaiting a response from the UK government.

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