On 4 November 2014, the Employment Appeal Tribunal (“EAT”) handed down its decision in Bear Scotland Ltd v. Fulton (and conjoined cases) which confirmed that non-guaranteed overtime should be taken into account when calculating holiday pay. It is a landmark decision which clarifies the position on calculating statutory holiday pay.
By way of background, the right to paid holiday is provided by the Working Time Regulations 1998 (“WTR 1998”). Under the WTR 1998 most workers (www.practicallaw.com/6-200-3640) have a right to a minimum of 5.6 weeks’ paid annual leave, this equates to 28 days for a full time employee. This is made up of:
Workers must be paid at the rate of a week’s pay for each week’s leave, calculated in accordance with the complicated regime contained in the Employment Rights Act 1996 (“ERA 1996”). The purpose of paid annual leave is to put the worker, during annual leave, in a position which is, as regards to remuneration, comparable to periods of work, so that there is no deterrent from taking holidays. Workers must therefore receive their “normal remuneration” for that period of rest.
The ERA 1996 distinguishes between employees with “normal working hours” and those with “no normal working hours”. A worker who has “normal working hours” will have their week’s pay calculated with reference to those hours. Generally, if a worker is entitled to overtime pay when working for “more than a fixed number of hours in a week or other period”, the worker is treated as having normal working hours equivalent to the fixed number. This effectively means that only guaranteed overtime is included. Where there are no normal working hours, a week’s pay is calculated as an average of all the sums earned in the previous 12 working weeks. This would include any overtime payments and commission.
Briefly, the above cases concerned the calculation of holiday pay where there were normal hours of work and an obligation upon the employees to work overtime. There was no corresponding obligation on the employer to provide overtime. The Judge referred to this as “non-guaranteed overtime”; it is overtime which an employee if requested is obliged to perform. This differs from:
The EAT held that payments for overtime which a worker is required to work but which an employer is not required to offer (non-guaranteed overtime) is “normal remuneration” and the WTR 1998 must be interpreted to achieve this. This means that overtime that a worker is not permitted to refuse (i.e. guaranteed and non-guaranteed overtime), must count as part of worker’s “normal pay” when calculating holiday pay.
There is no definitive statement in the Judgment to confirm that purely “voluntary overtime” would also be included in the calculation for holiday pay. However, the underlying ethos of various cases could be said to lean towards the view that voluntary overtime which is regularly worked by a worker would also count as part of workers “normal pay” and therefore be included when calculating holiday pay.
Further, the Judgment only applies in respect of the basic 20 days’ annual leave granted under the Working Time Directive and not the additional 8 days’ leave. As a result, workers can expect to receive a higher rate of holiday pay for 20 days out of their 28 day entitlement, with the remaining 8 days being paid at the level it previously was (under which only compulsory, guaranteed overtime is taken into account in respect of workers who work normal hours), unless the employer decides to pay all 28 days at the higher level.
In addition, the ERA 1996 uses a reference period of the last 12 working weeks to calculate pay where necessary (for example, in cases where the worker has no normal working hours or has normal working hours but their pay varies according to the amount of work done (pieceworkers) or the time of work (where pay is dependent on varying shift patterns)). It is now not clear if this is an appropriate reference period.
For example, a retail worker who does far more overtime during busy periods, say Christmas, would have a far higher average number as their “normal pay” if they took leave in January. Similarly, a salesperson who takes leaves shortly after an unusually large commission payment (since the case of Lock v. British Gas Trading Limited) could receive inflated holiday pay which is not representative of “normal pay”. In such cases, a longer period may be necessary and justified. The reference period must be a representative normal period and reflect normal working.
Given the potential implications of this Judgment, there is some good news that employers can take from this decision. The EAT significantly limited the extent to which workers can make claims for arrears of holiday pay. It held that claims for arrears of holiday pay will be out of time if there has been a break of more than 3 months between successive underpayments. This will therefore considerably limit the extent to which workers can make retrospective claims for any unpaid element of holiday pay.