Last reviewed 3 December 2014

A recent UK Employment Appeal Tribunal (EAT) case considered whether certain payments, including non-guaranteed overtime should be included as pay when calculating employees’ holiday pay. The EAT also considered whether if these payments were not included, employees could claim for having been underpaid in the past while on annual leave. Neil Baylis, solicitor at K&L Gates LLP, looks at the implications.

Non-guaranteed overtime is overtime that the employer does not have to offer but which must be worked if requested. Guaranteed overtime is overtime that the employer must offer and the employee must accept.

Bear Scotland

Bear Scotland carries out construction and maintenance of Scottish roads. The normal working hours of the first claimant were 37.5 hours per week, and the second claimant’s were 39 hours a week. The claimants received additional pay for overtime, night shifts (meaning that 55 hours were worked) and for being on standby or emergency callouts (eg gritting roads or removing debris).

The second claimant’s day or night shifts were determined by a roster and a telephone call asking him if he would like to work a night shift. It was not guaranteed that either of the claimants would have to work overtime but they had to do so if requested. Both of the claimants had always accepted overtime when requested.

When the claimants took holiday, they were paid only for their 37.5 hours and 39 hours respectively. Their pay did not include overtime, the extra hours for night shifts, standby payments or emergency callouts. It was held that, despite their contracts guaranteeing minimum hours, neither of the claimants had normal hours. Their hours varied depending on the additional work and pay.

Bear Scotland should have included in its employees’ wages non-guaranteed overtime and other payments linked to their work, when calculating holiday pay.

Holiday pay entitlements

Under EU law, full-time employees are entitled to a minimum of four weeks’ (ie 20 days’) paid annual leave. The UK has extended the minimum paid annual leave by an additional 1.6 weeks (ie 8 additional days). In addition, employers can always provide for additional holiday above the 28 days in their employees’ contracts.

EU law does not define how to pay annual leave. However, recent cases have suggested that paid annual leave includes receiving “normal remuneration” plus payment that is intrinsically linked to the performance of the employees’ tasks under their employment contracts.

Employees must not be disadvantaged by taking holiday as this would be a deterrent to taking it. An employee with normal (ie consistent) working hours who takes holiday must be paid the same amount he or she would have received had he or she worked that week.

For HGV/PSV drivers, working hours may be inconsistent and vary depending on factors such as how far away the destination is, when breaks must be taken, and having to sleep over on the way to the destination.

Employees with inconsistent hours are paid for holiday based on their average weekly pay over a 12-week period, although the present case did not clarify if 12 weeks was still the correct period to use. It should be noted that if an employee leaves his or her job without using all of their holiday then they are also paid for the holiday that has not been used (pay in lieu of notice).

The EAT’s ruling as it affects commercial drivers

The EAT decided that non-guaranteed overtime was included as normal remuneration and should therefore count as part of holiday pay.

HGV/PSV drivers may be required to do non-guaranteed overtime, such as driving to destinations at certain times (as long as this is within the legal driving and break limits) or may be required to help unload vehicles, fill in log books or take bookings. The judge stated that an appeal on these grounds would not have a “reasonable prospect of success”. This could possibly lead to a trend where more drivers are self-employed to avoid this issue of interpreting annual pay.

Voluntary overtime and travelling time allowances

There does not appear to have been clarification on where this leaves voluntary overtime (where an employee cannot be required to work and the employer does not have to provide it) but in principle if such overtime is worked often enough it should be considered as normal remuneration.

Note that the judge considered travelling time allowances to be part of employees’ normal remuneration. It was normal for the employees to receive this payment: it was not an expense linked to travel and was not paid solely because of where employees lived. The employers were granted leave to appeal.

Will drivers make a claim?

Since non-guaranteed overtime has not been included as part of paid annual leave for many years, HGV/PSV drivers may want to claim for these sums. However, non-guaranteed overtime payments and commission only apply to the minimum four-week holiday granted by the EU and employees will take this holiday before the additional 1.6 weeks of UK holiday.

The additional UK holiday only includes basic pay and any guaranteed overtime. Employers may want to amend employee contracts to state that employees will take the EU four weeks before the UK 1.6 weeks of holiday.

A person has three months to make a claim at an employment tribunal, although this period can be extended by the tribunal if it believes it was not reasonable for a claim to be made before this time limit.

There was concern that the judge could have allowed claims going back to 1998 (when the legislation came into force), but this was limited so that the underpayment (non-payment of non-guaranteed overtime) must have been within the last three months. Where the underpayment was more than three months ago, it must form part of a “series of deductions” with the last in the series being three months ago and each series being no more than three months apart.

The series of deductions is likely to be broken by the UK’s 1.6 weeks taken between two periods of EU four-week holidays. However, some employees may try to argue that the entitlement at the correct rate of pay was part of their contract, thereby giving rise to a right to claim for up to six years of underpayment.

The judge believed that the series of unlawful deductions point is “arguable as well as of public importance” so there is a possibility that it will be overturned on appeal.

Advice for employers

  • Employers could face claims from employees who contact their trade union, a claimants firm, an Acas conciliation service, or their employer directly.

  • Employers should find out:

    • the amount that is potentially owed to employees

    • whether the three-month limitation for claims has passed for any of the employees. If the limitation has not passed, employers could consider paying employees for non-guaranteed overtime to break the series of deductions and prevent future claims.

    • Administration and payroll costs could increase as employers will have to reflect that non-guaranteed overtime may be included in EU but not UK holiday pay. Average pay, rather than just basic pay, may need to be taken into account for some employees.

However, it may be premature to change policies now, as appeals to the Court of Appeal and then through the European Courts on these issues are possible. Furthermore, the Government is preparing a taskforce (of government departments and business representative groups like CBI, EEF and the Institute of Directors) to analyse the case and assess how to limit the impact on businesses. We will report further as the issue develops.