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, K&L Gates LLP, considers the outcome.

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.

Hertel (UK) Ltd and AMEC Group Ltd

Hertel (an industrial services company) was the main mechanical and electrical contractor for the West Burton power station, one of the largest construction projects in England at the time. AMEC (an engineering firm) was a sub-subcontractor. The AMEC claimants were semi-skilled mechanical mates and electricians and the Hertel claimants were scaffolders. The claimants were made redundant and received pay in lieu of notice (“PILON”).

The claimants had a basic working week of 38 hours a week but in reality they worked at least 44 hours a week. Non-guaranteed overtime was required by management to meet the requirements of the project. Hours over the 38 hours were not taken into account for holiday pay entitlement or PILON. There were radius allowances paid to any employee who worked a full day’s work and travelled every day from his/her home to a site over eight miles away. There was a travelling time payment paid for time spent travelling. There were also incentive bonus arrangements.

Hertel and AMEC were both found to have made unauthorised deductions from their construction workers’ wages by not including the non-guaranteed overtime when calculating holiday pay. It was a breach of contract not to include these payments in the PILON.

Holiday pay

Under EU law, full time employees are entitled to a minimum of 4 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/she would have received had he/she worked that week.

For construction workers, working hours may be inconsistent and vary depending on factors such as overtime required. Employees with inconsistent hours are paid for holiday based on their average weekly pay over a 12-week period, although the case we are considering did not clarify if 12 weeks was still the correct period to use. It should be noted that if an employee leaves his/her job without using all of his/her holiday then he/she is also paid for the holiday that has not been used (PILON).

The EAT decided that non-guaranteed overtime was included as normal remuneration and therefore should count as part of holiday pay. This was because despite having agreed hours of 38 hours a week, the construction workers always worked at least 44 hours a week. It was normal to work these additional hours and a regular overtime payment was received for them. The judge stated that an appeal on this ground would not have a “reasonable prospect of success”.

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.

Making a claim

Since non-guaranteed overtime has not been included as part of paid annual leave for many years, construction workers may want to claim for these sums. However, non-guaranteed overtime payments and commission only apply to the minimum 4-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 4 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 1.6 weeks taken in between two periods of EU 4-week holidays. However, some employees may try to argue that the entitlement at the correct rate of pay was part of their contract and there was a breach of 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.

Expenses — Radius and travelling time allowances

The judge considered whether travelling time allowances were part of employees’ normal remuneration. Payments that are expenses are not included in annual pay calculations. The judge decided that travelling time allowances were not an expense linked to travel, such as a train ticket or bus fair, as they were intrinsically linked to work and were not paid solely because of where the employee lived.

It was normal in the construction industry to pay employees for time spent travelling to different sites. The employers were granted leave to appeal.

Advice for employers

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

  • Find out the amount that is potentially owed to employees.

  • Find out 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, and 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, including the CBI, EEF (manufacturers’ association) 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.