Should overtime be included in holiday pay?

In the case of Bear Scotland v Fulton the Employment Appeals Tribunal (EAT) looked at whether non-guaranteed overtime payments should be included in the calculation of holiday pay.  The ruling is of relevance to any business which pays overtime or commission.

For example, if you have an employee who is contracted to work 20 hours per week but who usually works an extra five hours in non-guaranteed overtime, how much do you pay them when they take a week’s holiday?  The short answer, according to Bear Scotland, is 25 hours pay not 20 hours.

For many years, employers have been paying the lower amount without issue.  However, several cases have challenged this practice as being incompatible with European law.  In Bear Scotland the key decisions were:

1. A sum of money should be included in holiday pay to reflect the non-guaranteed overtime worked by employees.
2. This applies to just the four weeks of holiday granted to employees by European law. The remaining 1.6 weeks (or more) enjoyed by employees does not need to include an additional sum for overtime.
3. Employees cannot claim back-pay if there has been a break of more than three months between successive underpayments.

Before this decision there was much concern about the scope for back-pay claims going back years. However, the EAT has given businesses something of a break by severely limiting the scope for such claims.

The case is not going to be appealed by the employees, but we may see other cases which seek to extend the possibility for back-pay claims.

Even as I write, the saga goes on. Yesterday the government announced that it will legislate to limit back-pay claims to the two years before the claim is issued. The new law is expected on 1st July 2015 so there is still time for disgruntled employees to claim for more.

We appreciate that this is a difficult area and what you do next will very much depend on your own circumstances.  As a general point, we would advise employers to start assessing the costs, taking advice and putting appropriate strategies in place.  We are already working with clients to limit their exposure.

Do you pay overtime or commission?  If yes, do you include overtime and commission when calculating holiday pay?

If the answer is no, you may need to update your calculations and you could face a claim for back-pay, so please get in touch to discuss this or any other HR issues by calling the team on 020 7234 0200 or emailing employment@waterfront.law