EAT Ruling – Overtime To Be Included In Holiday Pay

The Employment Appeal Tribunal’s (EAT) recent groundbreaking decision that overtime should be included in holiday pay attracted widespread publicity.

This decision has been described as having ‘changed the law’ because of the requirement to include guaranteed and regular overtime payments.

The Government has estimated that about five million workers receive overtime payments but the actual number of people entitled to claim as a result of this ruling is likely to be much more limited.

Triangle HR Case studyIt applies when calculating holiday pay for the minimum four-week annual leave entitlement, as required under EU law; until now, only a worker’s basic pay had counted towards this calculation.

Union representatives were delighted with the outcome, hailing it ‘a victory for workers’ rights’. From an employer’s perspective the decision has been viewed as one that ‘could cost industry billions’; some trade associations have said their members would have to reduce investment plans and that this decision could affect the vast majority of the manufacturing sector.

The new rulings came about because of claims that there was a conflict between British and EC employment laws regarding the calculation of holiday pay. European legislation states that employees are entitled to a minimum of four weeks annual leave, but doesn’t stipulate how this should be calculated.

A previous ruling from the European Court of Justice stated that holiday pay ought to be calculated from ‘normal remuneration’ including ‘any payments linked intrinsically to the performance of the worker’s tasks’. The EAT’s judgment leaves the position on voluntary overtime unclear.

There have been several recent employment tribunal decisions permitting holiday pay claims – due to the fact that employees were not receiving their full entitlement for their four-week EU annual leave entitlement; a breach of EU regulations.

Employers had expressed concerns (which could remain valid) that employees would be entitled to submit claims dating back to 1998, the year the Working Time Regulations were implemented. The new ruling is intended to restrict opportunities for staff to pursue retrospective claims for any outstanding holiday pay and to exclude the linking of historic holiday periods.

Reports in the media included views from legal experts, including Glenn Hayes, an employment law partner from law firm Irwin Mitchell. Hayes said, ”The Employment Appeal Tribunal appears to have shut down the argument that employees could backdate claims on the basis that they had suffered a series of deductions from their wages when taking holiday, albeit there remains some uncertainty as to what denotes a ‘series’ and how this can be broken.”

This ruling is unlikely to be the end of the matter however. It may be referred to the Court of Appeal by employers against this interpretation of Working Time Regulations – although the EAT has expressed the view that it would not have a reasonable prospect of success. Employees would argue the right to pursue claims relating to previous periods of annual leave. Either way a quick outcome may not be likely.

The questions over calculation of holiday pay are not going to be resolved definitively in the near future. This ruling applies not only to overtime payments, but other payments such as commission (on which there is a separate case pending). It is premature for businesses to change their holiday pay arrangements now or enter into negotiations about backdated compensation for employees.

Rather, in the meantime, employers are recommended to undertake a thorough review of their current arrangements and working practices to assess any potential financial impact of this ruling so they can anticipate how they can absorb any increased costs related to holiday pay.

For more information on how the new regulations will affect your business and advice on making sure your HR policies and procedures are up to date, please call Justine and the team on 01743 444007 or email