Non-Guaranteed Overtime to be Included in Holiday Pay

Following on from our Hot Off The Press legal update, we report in more detail below on the much publicised decision of Bear Scotland Ltd v Fulton UKEATS/0047/13 & Others in which the UK Employment Appeal Tribunal (EAT) decided that non-guaranteed overtime should be taken into account for the purpose of calculating holiday pay.

This decision is based on the EAT's view that European working time legislation requires non-guaranteed 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 UK working time legislation should be interpreted in line with European law in this regard.  What this means in practice is that to comply with UK 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 non-guaranteed 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: (i) such a claim would have a three-month time limit; and (ii) 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 UK 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 non-guaranteed 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, you may recall that we reported in the summer 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 UK Employment Tribunal to determine its impact under UK law and the hearing is expected to take place in the early part of next year. We will keep you updated.