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3 ways to avoid trouble with overtime holiday pay

Christopher Saunders - DAS Law

  1. 27 February 2015
  2. Employment
  3. 0 comments
Employee relaxes

As a result of a recent ruling from the Employment Appeal Tribunal (EAT), employers now need to consider how they will calculate holiday pay for employees who have worked overtime.

The Fulton v Bear Scotland ruling could see employers paying years of backdated pay to employees, and many employers will need to find a strategy to make sure that they aren’t similarly taken to court for this issue in the future.

There are three strategies that employers can adopt in order to avoid or mitigate the risk of a claim – here are my thoughts on how you can adopt them and what the potential risks might be.

Include the non-guaranteed overtime pay within holiday pay

This will effectively prevent claims from being brought against the company, and will also ensure that positive working relations with staff are maintained.

It must be remembered that the EAT’s decision has been widely publicised, so it would be quite natural for an employee to feel aggrieved if their employer is not adopting what is now considered to be the accepted legal position.

Employers need to weigh up the potential financial cost of being sued (which will depend on the dynamics of their workforce – for instance, the number of employees working overtime) and the time, resources and added expense of dealing with internal grievances and any subsequent employment tribunal proceedings.

Summary of my view

Whilst the inclusion of non-guaranteed overtime pay within the calculation of holiday pay will cause initial costs to soar, its inclusion will have the effect of maintaining positive working relations with the workforce and will avoid the risk of tribunal proceedings, which can cause both financial and reputational damage to an employer.

Make it clear in the contract of employment that overtime hours are entirely voluntary

The Bear Scotland decision only relates to non-guaranteed overtime, i.e. hours which employees are obliged to work if given by an employer. It does not expressly relate to overtime which employees can refuse to work.

It would therefore be sensible to expressly state within the contract of employment that overtime hours are entirely voluntary, as the express terms will be the starting point for any tribunal.

Unfortunately, this will not provide entire protection, as the tribunal will look at the working reality of the employment relationship, so if employees are effectively working overtime regularly and consistently, a tribunal may conclude that the hours worked are actually non-guaranteed hours, and should therefore be included.

Also, there has been a decision, albeit at tribunal level (Neal v Freightliner), which suggests that even voluntary overtime should be added. Unfortunately this was not decided by Bear Scotland, so there is insufficient clarity in this area.

Summary of my view

Employers can expressly state within the contract of employment that overtime hours are entirely voluntary, as this type of overtime may not be included within the calculation of holiday pay.

However, employers will need to ensure that overtime is not worked ‘regularly’, as tribunals can overlook the ‘label’ applied within the contract if this is the case. This may however still be challenged.

Restrict and dictate when holiday can be taken

Holiday pay within the UK is based on a calculation of the preceding 12 weeks’ pay. Therefore, employers may be faced with a situation where their workforce may work overtime hours more frequently at certain periods of the year. Employees may want to take holiday shortly after this period so their holiday pay is effectively augmented.

Under the working time regulations, employers are able to approve or decline requests made by employees to take holiday. An employer may want to consider limiting the taking of holiday during those busy periods of the year to reduce larger liabilities for holiday pay.

If employers wish to adopt this approach, they must remember that employees should be permitted to take their holiday within the annual leave year, and that each case should be considered in isolation in order to avoid the risks of discrimination claims; for example, a religiously devout employee who wishes to take annual leave during a specific period for religious celebration may feel rightly aggrieved by an outright refusal without any merit.

Once again, this is not entirely free from risk. Whilst the calculation under our national law looks at the preceding 12 weeks, there have been some comments in the case of Lock v British Gas, where the European Court of Justice gave their opinion that the reference period should be the preceding 12 months.

This case was in connection with the effect of commission and holiday pay, so is not quite the same as Bear Scotland. However, the decision has paved the way for employees to argue that the UK’s reference period may not be the correct approach. As it currently stands, UK law tells us to make the calculation based on the previous 12 weeks, but this is up for challenge.

Summary of my view

Employers may want to restrict the taking of holiday during certain periods of the year where their liabilities to pay holiday pay may be greater. However, this approach is not without its risks.

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