EAT rules that overtime should be included in holiday pay
As a result of today’s landmark judgement of the Employment Appeal Tribunal, as many as 1 in 6 UK workers will be able to have their overtime and commission payments reflected in their holiday pay.
The EAT ruled in favour of a group of employees whose pay is regularly topped-up by working overtime and who had argued that these payments should be reflected in their holiday pay in line with the EU Working Time Directive. The ruling could also be applied to employees who regularly top up their pay with commission payments.
However, employers who are affected by the ruling will draw comfort from the fact that an additional claim that arrears of holiday should be backdated to 1998 or the start of employment, if later, was rejected by the EAT.
Under the Working Time Regulations 1998, holiday pay has been calculated on an individual’s basic salary. However, the Claimants in this latest case argued that this was contrary to EU law which requires that a worker’s pay should be based on ‘normal salary’ and should therefore include any element of pay ‘intrinsically linked’ to the tasks required under the worker’s contract, including overtime.
The effect of today’s judgment is that elements of pay which are currently excluded from holiday pay must be included in future calculation of pay. This will inevitably lead to increased holiday pay liability for employers who regularly pay overtime, commission or possibly shift premiums. However, the effect of the ruling is likely to be that employees can only claim arrears of pay in respect of one leave year, rather than, as had been feared, in respect of underpaid leave as far back as the start of their employment or 1998.
The ruling strictly applies only to the four weeks’ annual leave guaranteed under EU law. The additional 1.6 weeks granted to workers by UK law need not include overtime and can continue to be calculated on basic salary only.
A further appeal to the Court of Appeal is possible and it is unlikely that today’s judgment will be the last word on the subject.