In an important judgment, the Employment Appeal Tribunal (EAT) has ruled that holiday pay should include recognition for overtime payments in certain situations. The decision in Bear Scotland Ltd v Fulton & anor has been widely publicised, but what will be the real impact of the decision, and to what extent will schools need to change their existing arrangements?
This article sets out some of the background to the case, and provides some guidance on the options for schools going forward.
All workers have a statutory right under the Working Time Regulations 1998 (“the Regulations”) to a minimum paid holiday entitlement and may also have an enhanced contractual holiday entitlement.
The Regulations, which came into force on 1 October 1998, provide for a statutory minimum amount of paid holiday for workers. This was initially three weeks a year, but rose to four weeks in 1999, 4.8 weeks in 2007 and finally to 5.6 weeks in April 2009. This equates to a minimum of 28 days per annum for full-time workers (which can include bank holidays). Many workers receive a more generous entitlement under the terms of their contract. Part-time workers are entitled to a pro rata statutory entitlement under the Regulations. Workers are entitled to be paid during any period of statutory annual leave at the rate of a “week’s pay” for each week’s holiday.
The law in relation to holiday pay has been continually developing, partly because key terms in both domestic and European legislation are not defined and are open to varying interpretation. Interpreting national legislation, the Court of Appeal held 10 years ago that compulsory, non-guaranteed overtime should not be included in holiday pay under the Regulations. However, the European Court of Justice (ECJ) held more recently that holiday pay should reflect “normal pay” under the Working Time Directive 2003 (EU Directive), including elements of commission. The question of what is included as “normal pay” and particularly whether this encompasses elements of overtime has subsequently been interpreted in a number of recent cases, the most recent of which is the Bear Scotland case.
The implications of the Bear Scotland decision
In Bear Scotland it was argued that overtime which workers are obliged to work if requested but which employers are not obliged to offer (“non-guaranteed overtime”) should be included as “normal pay” for the purpose of calculating holiday pay. The EAT agreed with this argument, finding that, for the purposes of calculating holiday pay, “normal pay is pay which is normally received”.
There are three key points for schools to consider as a result of the ruling:
1 The EAT decision only considered “non-guaranteed” overtime. This is not the same as ad-hoc or voluntary overtime, and so some uncertainty still remains as to whether overtime which is not guaranteed and which is truly voluntary for the employee will fall within the scope of “normal pay”. However, the “direction of travel” and an earlier Employment Tribunal decision (which is indicative but not a binding precedent) do support that when overtime is normally worked this should be included in holiday pay. The principle is to effectively ensure that an individual receives the same pay when they are on holiday as they would if they were at work.
2 The entitlement only applies to the basic entitlement of four weeks annual leave under EU law and does not apply to the additional 1.6 weeks leave entitlement under national law or any enhanced contractual entitlement. This potentially serves to limit exposure to both back pay and payments going forward.
3 The EAT also held that travel time payments which exceed expenses incurred, and which amount to additional taxable remuneration, should also be included as “normal pay” when calculating holiday pay.
What does this mean in practice?
For schools, this is mainly going to affect support staff who receive overtime payments when they work over and above their core hours. For example, a school employs a catering manager who works term-time only. Their pay is based on an hourly rate which is paid for their working weeks and for five weeks holiday. This is then calculated as an annual salary and they are paid in 12 equal monthly instalments. Overtime is regularly worked to cover for functions and other events. The employee submits time sheets for the hours worked and is paid double time. This is usually paid in the following month’s pay roll. Following the Bear Scotland decision the employee will need to allocate when they take their holiday (which can be during school holiday periods) and the statutory four weeks will then need to be paid based on their “normal pay” which should be based on the average pay they have received during an “agreed reference period” (for example, the previous 12 weeks). This will include their basic pay and their average weekly overtime.
Backdated holiday pay claims
There has been considerable concern over the impact of this ruling on employers, and particularly the possibility for claims to be backdated to 1998 when the Regulations were introduced. These claims are brought as unlawful deductions from wages. Previous case law had established that such claims could be claimed back to 1998 or the commencement of an individual’s employment (whichever is later). Schools will be relieved to hear that the EAT in Bear Scotland included a limitation in this regard. Any break of three months during which there have not been any “unlawful deductions” will break the chain. This will prevent employees claiming for arrears prior to that date. It seems this will greatly restrict the scope for workers to claim arrears in holiday pay.
How far back can employees pursue claims for unpaid holiday?
In accordance with Bear Scotland claims will be out of time unless they are brought within three months of the end of an employee’s employment; the last period of statutory holiday during which they did not receive “normal pay”.
Accordingly, it will be necessary to review the records of overtime worked, against holiday and pay records to assess how far back a claim could be pursued.
This is a new concept from the Bear Scotland case which does not accord with other decisions and so this may well be subject to appeal and so there is still a prospect that claims could be backdated further. However, it is important to note that if systems are changed so that there is no longer a “series of deductions”, then this will start the time running for the three-month limitation period, after which employees will no longer be able to pursue a claim.
It is important to note that, in this case, leave to appeal to the Court of Appeal was granted. It is likely that both parties will appeal both in relation to the principle of inclusion of non-guaranteed overtime and in relation to the time limits on arrears.
What action should schools take?
There are a number of options going forward:
1 Do nothing until after the appeal process has been concluded on the basis that until this point the legal requirements are uncertain. This is likely to be the most popular option. However, it might cause accrued liabilities to increase and, in particular, there is risk that the appeal could lead to an increased exposure to back-dated claims.
2 Change the approach to calculating holiday pay in accordance with the new decision for payments going forward. This deals with future liability but may prompt claims for arrears. However, after three months have passed schools will have the comfort that there will not be any further claims, as they will be out of time and cannot be re-opened. The downside of this is that you may be committing to payments unnecessarily, if the Bear Scotland decision is overturned on appeal.
3 Seek to settle any past underpayments. This would offer certainty, and avoids potential litigation. Any claims may also be smaller now than after appeal depending on the “limitation period” point. Again, however, there is a risk that the school could overpay, particularly if the legal position changes again in the future.
4 Schools may also wish to review more generally how overtime is offered and paid. It may be that it is more cost effective to use bank or zero-hour staff to undertake fluctuations in work rather than offer overtime particularly if this is on enhanced rates.