Nonguaranteed Overtime to Be Included in Holiday Pay in U.K.

By Alex Denny and Emma Vennesson Dec 9, 2014

The United Kingdom Employment Appeal Tribunal (EAT) decided that nonguaranteed overtime should be taken into account for the purpose of calculating holiday pay in the much publicized decision Bear Scotland Ltd v Fulton UKEATS/0047/13 & Others.

This decision is based on the tribunal’s view that European working-time legislation requires nonguaranteed overtime (i.e., overtime which the employer is not obliged to offer but which the employee is obliged to work if offered) to be included within “normal” remuneration when calculating holiday pay and that U.K. working-time legislation should be interpreted in line with European law in this regard. What this means in practice is that to comply with U.K. working-time legislation, employers now need to calculate holiday pay on the basis of the average remuneration received by an employee, based on their basic pay and any nonguaranteed overtime worked (as well as any other “normal” remuneration) over the 12-week period prior to their taking holiday.

Aside from potentially significant variations in holiday pay rates throughout the year, this decision could have major financial consequences for employers that require employees to work overtime. However, initial fears that businesses would be exposed to huge retrospective claims have been much reduced as the EAT’s decision limited the scope for this to occur in the following ways:

  • Such a claim would have a three-month time limit.
  • If there was a break of at least three months between underpayments, then the ones before that break would be time-barred.

Although the EAT gave the parties leave to appeal, it is uncertain at this stage whether such appeal will be pursued and if it is, it is likely to take several months for any appeal decision to be delivered. It is also worth noting that the U.K. government has set up a task force in an attempt to assess and limit the impact of the decision but it is also likely to be some time before any decision taken by this task force is implemented.

While awaiting an appeal decision or governmental measures, employers affected by this judgment will need to decide whether or not to start including nonguaranteed overtime in holiday pay. In any event, and in particular if they choose not to do so, they would be well-advised to make some financial provision and/or seek insurance for their potential retrospective and future liabilities.

Finally and perhaps of more general importance to employers, is an update on the case of Lock v British Gas Trading Limited (C-539/12) in which the European Court of Justice decided that sales-based commission should be taken into account for the purposes of calculating holiday pay. This case was remitted to a U.K. Employment Tribunal to determine its impact under U.K. law and the hearing is expected to take place in the early part of 2015.

Alex Denny is a partner and Emma Vennesson an associate in Faegre Baker Daniels’ London office.

Copyright 2014 © Faegre Baker Daniels LLP. All rights reserved.

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