Holiday Pay blues for employers round 2

Holiday Pay and Overtime Warning
A first instance decision in the Employment Tribunal has provided a stark warning to employers when calculating holiday pay for employees who work overtime. In Neal v Freightliner Limited, it was considered whether employers should calculate holiday pay on an employee’s total remuneration, including overtime, or whether it should be on basic salary alone.
The tribunal decided that it should include overtime. Although this is not a binding decision, the judgement stated it was consistent with the British Airways Supreme Court case which considered pilot’s remuneration, which stated that under the Working Time Regulations holiday pay should be calculated according to both basic pay and any other pay ‘intrinsically linked’ to the work, such as overtime.

The Neal decision is being tested in the higher courts, though in the meantime employers should be considering how they calculate holiday pay. Should an employee claim their holiday pay was incorrectly calculated they would be able to make a claim for up to the previous 6 years for incorrect holiday pay. However, should the situation be remedied by the employer, the employee will have three months from the last incorrect payment to bring an unlawful deduction from wages claim.
Should this decision be affirmed it could well be a ticking time bomb for large employers with a significant proportion of their workforce undertaking overtime. The pay, should it be calculated to include overtime, would make reference to the average earnings including overtime from the preceding 12 weeks.
In the Neal case, the employer argued that although the employee regularly worked in excess of his contracted hours, it was voluntary, the ET were not convinced and stated that regardless of the nature of the arrangement, whether it is compulsory or not it should be included in the holiday pay calculation. The decision interestingly only affects the 4 weeks’ annual leave required by the Working Time Directive and not the 1.6 weeks’ provided for by the Working Time Regulations.
The decision stated that where an employee was performing tasks that he was required to do under his contract on an overtime basis the work would be ‘intrinsically linked’ for the purpose of the remuneration test. Whether careful drafting of employment contracts in respect of overtime will be able to bypass this is yet to be seen, it is questionable whether the Tribunal will have tolerance for clauses which deliberately seek to avoid paying any additional holiday pay.
Employers should monitor the situation; those who are risk averse should consider taking advice on calculating the ‘correct’ amount of holiday pay; paying employees any additional amounts and therefore starting the three month time limit. Watching and waiting to see whether the decision is affirmed is an option, though should this matter receive more press (it has been currently kept relatively under the radar) there could be serious implications that could see holiday pay claims dating back for up to 6 years.

The Neal case and one other are listed for hearing now in July so will update you all once the results are known. Its likely to be bad news for employers in the light of the recent ruling on holiday pay in respect of commission.