The Employment Tribunal has said, in Neal v Freightliner Limited, that the defendants should have included overtime payments when calculating holiday pay.
The tribunal decided that it should include overtime. While not a binding decision, the judgment is consistent with the British Airways Supreme Court case concerning pilots’ 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, which includes overtime.
While the Neal decision will be tested in the higher courts, in the meantime employers should be examining how holiday pay is calculated. If an employee claims that their holiday pay was calculated incorrectly they would be able to make a claim for a period up to the previous 6 years for incorrect holiday pay. However, if the employer remedies the situation the employee will have only three months from the last incorrect payment to bring a claim for unlawful deduction from wages.
Any employer for whom staff wages frequently include overtime pay should consider this to be a warning of danger ahead. Holiday pay should be calculated on average earnings including overtime payments for the 12 week period immediately preceding the commencement of a holiday.
In this case the employer said that the employee voluntarily worked longer than his contracted hours on a regular basis, but the Employment Tribunal stated that it was immaterial whether the overtime was voluntary or compulsory and that the pay must be included when calculating holiday pay.
The decision affects the four weeks annual leave in accordance with the Working Time Directive but, somewhat curiously, not the additional 1.6 weeks under the Working Time Regulations.
Employers are left with two choices:
1. Do nothing and hope that the decision is reversed in the higher courts, in which case everything will carry on as it was before. If the decision is upheld, employees with similar cases could issue claims for holiday pay underpayments for a period going back up to six years. Once the case is splashed across the media there won’t be anyone who doesn’t know about it.
2. Make amendments to holiday pay now, which will begin a three month period during which anyone in a position to make a claim of this type can do so, but after which no claim can be brought.
Neither choice is particularly attractive for employers as each is a gamble. Changes in contracts could offer some protection for the future, but it’s unlikely that a tribunal will have much sympathy for employers with contracts that are designed to avoid every element of overtime pay being factored into holiday pay.
Linking overtime and holiday pay in this way has certainly opened up a can of worms, but the appeal is imminent.