Aug 2013


UK - Holiday pay should reflect overtime payments

A recent judgment has bent the rules under the Working Time Regulations and moved the UK closer to EU law

Calculating the correct amount of holiday pay owed to an employee under the Working Time Regulations 1998 has historically proven to be a tricky task for employers. The regulations require employers to identify an employee’s ‘normal working hours’ and a ‘week’s pay’ when calculating holiday pay and specifically say that non-contractual hours of work should be ignored. In practice, this isn’t as easy as it sounds.

A 2011 case, Williams v British Airways, shed some light on the situation. The European court held the regulations should be interpreted in the spirit of European working time law and that holiday pay should be calculated with reference to both basic pay and any other pay “intrinsically linked” to the work, such as overtime. Now those principles have been tested for the first time in the case Neal v Freightliner [2013]

Neal worked a 35-hour week at Freightliner’s depot in Birmingham. His contract required him to work 7-hour shifts, and also stated that he may have to work overtime when necessary. His shifts and working hours were determined by a roster system. He regularly worked up to nine hours each day and occasionally up to 12 hours to cover for his colleagues. He received enhanced pay premiums when working over and above his contractual seven hours a day. Neal believed he had to work the significant hours set out in the rosters and felt his holiday pay should reflect the actual pay he received rather than his basic salary alone.

The employment tribunal, applying the Williams case, highlighted that the Working Time Regulations do not adequately implement European law on working time. The tribunal held that hours worked by Neal over and above his contractual seven hours were “intrinsically linked” to his performance of his role, and it was irrelevant whether the overtime was voluntary or not.

It rejected the employer’s argument that workers might be encouraged to undertake paid overtime to manipulate the level of their holiday pay, concluding that, in practice, employers control the levels of overtime offered and accepted by their staff.

Neal had been underpaid in respect of his holiday pay entitlement and the parties arranged an out of court settlement.

This decision could be tested by the higher courts but, for the time being, any paid overtime (whether voluntary or not) should now be considered alongside other premiums in employers’ holiday pay calculations.  In effect, these calculations are moving towards being based on workers’ average earnings in the 12 weeks leading up to their holiday.    

Employers should review their overtime arrangements to ensure they have sufficient control over them, and can avoid abuse and manipulation of holiday pay. As an added complication, this decision relates to the four weeks’ holiday pay that workers are entitled to under European law.  It does not apply to the additional 1.6 weeks’ holiday that workers receive under UK law.  So it seems likely that the judgment will be appealed to clear up the confusion and avoid a situation where there are different rules for different weeks of a worker’s holiday. As always, if in doubt, employers should seek legal advice when calculating holiday pay to avoid receiving a costly and time-intensive tribunal claim. 

Posted byAlan KellyinPayroll