‘We’re all going on a summer holiday, no more overtime for a week or two.’ So Cliff Richard (almost) sang in the 1963 classic. Yet when I think of that film I have never, until now, imagined that Nigel Farage might be driving that bus across Europe.

For what a lot of interest there was in November’s Employment Appeal Tribunal judgment in the combined cases of (1) Bear Scotland v Fulton (2) Hertel (UK) Ltd v Woods and (3) Amec Group Ltd v Law. I like a holiday pay case as much as the next employment lawyer, but they do not usually trouble me when I take my morning shower with Moira Stewart. This can only mean two things. Either employment law is the new rock and roll, or the media are desperately trying to crank up the EU referendum debate.

Given the attention UKIP received after gaining just one seat at Westminster, we can safely assume it is the latter. But this should not deflect us from an important decision. Important not just because of what must now be included in the pay calculation, but also in how the EAT has tried to stem the flow of claims for back pay and what it neatly avoided.  

The case involved the complex question of the need to include non-guaranteed compulsory overtime payments (though not other types of overtime) when calculating holiday pay for workers who work overtime. For many employees a day’s holiday pay will be a simple calculation, but for some the amount might vary greatly, depending upon the outcome, and for others (with different types of overtime arrangements) the debate was bound to go up a few degrees.

Where the amount of such pay is too low, this might of course be an unlawful deduction from wages. The combined case raised the question of how far back claims might go. In short, would the ‘euro-sausage’ sink British industry and boost Farage’s poll ratings?

The problem derives from regulation 16 of the Working Time Regulations 1998 (WTR), which provides that workers should receive a ‘week’s pay’ in respect of each week of leave. This is simple enough until we turn to sections 221-234 of the Employment Rights Act 1996 (ERA) to find what is defined as a week’s pay.

This is, oddly, clear enough where there are no ‘normal working hours’, but under section 221 where there are normal working hours the amount of holiday pay is referable to the pay for those hours. Section 234 does not define normal working hours, but does state that where an employee is paid overtime for work done over a fixed number of hours, the normal hours are the fixed ones. This has the effect of apparently excluding overtime from holiday pay calculations for those workers who have fixed ‘normal’ hours.

The only exception is where overtime is ‘guaranteed’, meaning that the employer is obliged to provide it and the worker is obliged to do it. In that case the overtime hours form part of the ‘normal hours’ and are included in the calculation of holiday pay.

The EAT had to grapple with this in the context of the European Working Time Directive (2003/88/EC). It ruled that it is possible to construe regulation 16 in accordance with EU law, meaning that its ruling applies in the private as well as public arena. The way this seems to work is that those who are paid overtime should now be deemed not to have ‘normal working hours’ during the period in which overtime was worked (that is, look at section 224 of the ERA) unless they work the same amount of overtime every week, in which case those overtime hours will become part of normal working hours.

Under section 224 this will simply involve looking at the 12-week period prior to taking holiday and deriving a weekly average. At the same time, the EAT disapplied section 223(3) of the ERA for the purpose of calculating holiday pay for the basic four-week entitlement (which stated that overtime premia should be ignored in the calculation).

The position for guaranteed overtime (that must be offered and, when offered, worked) has been clear for some time – it should be included under the principle set out in Bamsey v Albon Engineering [2004] IRLR 457. After some discussion the EAT has now found that non-guaranteed overtime (which the employee must work if offered) must also be included when calculating holiday pay for the basic four-week holiday period. It also found that this is not necessary for the additional 1.6 weeks provided for under the WTR, nor, it follows, for any additional contractual overtime.

Interestingly, though, it made it clear that employees were not entitled to choose which days fitted into the basic or additional category so as to cherry-pick. The fact regulation 13A of the WTR is called ‘additional leave’ suggested to the EAT that this means basic leave is taken first.

It is notable that ‘commission’ (following Lock v British Gas [2014] EUECJ C-539/12) and other sums linked to tasks employees are required to perform under the employment contract must also be included in holiday pay calculations for the basic four-week period. This might include items such as productivity and attendance bonuses.  

But what of purely voluntary overtime (which need not be offered but if offered need not be worked)? This remains less clear as it was not expressly dealt with by the EAT, but we can make certain deductions. The principle is of course that employees must receive normal remuneration while on holiday. The argument then is that all payments which are intrinsically linked to the performance of the tasks which the worker is required to carry out under the contract must therefore be included (under the principle in Williams v British Airways [2011] IRLR 948).

While the EAT did not have to decide the issue directly, it did state that ‘in so far as the test seeks an intrinsic or direct link to tasks which the worker is required to carry out (stressing those last four words) it would be perverse to hold that overtime in these cases was not [so required]’. There must then remain an argument that payment for purely voluntary overtime is not intrinsically linked to tasks which the worker is required to carry out under the contract as they cannot be required to do the overtime – but this may depend on what is meant by ‘task’.

If the overtime is the task, then it is not required under the contract. But if what the employee is doing while working overtime is the task, then it is required to be done under the contract.     

What about a situation where overtime is worked only rarely? Again the judgment did not expressly deal with this, but surely a distinction can be made. Normal pay is by definition that which is normally received. The advocate general in Williams indicated that payment has to be made for a sufficient period to justify that label. That suggests there may be arguments that where overtime is performed only rarely, payment for that overtime does not form part of normal remuneration and does not have to be included.

If all that was not confusing enough, the real fear for employers was how far back these claims go. There is some good news for them. The distillation is this. A claim for underpayment would be brought in the employment tribunal as an unlawful deduction from wages. These have a three-month time limit and the EAT decided that if there is a break of at least three months between deductions in a series of deductions, then the ones before that break are time-barred.

For practical purposes this means that if an employee is paid correctly for three months or more in between two separate periods of holiday, they lose the right to claim in respect of the earlier period. As many employees will space out their holiday, this is likely to seriously limit claims. Also, given the view that the findings on overtime pay will not apply to additional holiday leave under regulation 13A, payments of holiday pay for those extra days at the end of a year will also be likely to break the chain.

So, did the decision really deserve to interrupt the nation’s breakfast? Perhaps not, but it made a refreshing change. Although in some sectors the decision may have important consequences, those in the unionised sectors may have ironed out this anomaly in favour of workers some time ago, and for many salaried workers the issue of overtime these days sadly does not often arise. The ability to limit back claims has also taken steam out of the debate.

Employers will also have to decide whether to comply now or gamble on change, since leave has been given to appeal to the Court of Appeal.

It might also be said that the impact of Europe on the decision was quite sensible. And at least Farage can take comfort in this: it was a case decided by a ‘British’ court.

Darren Clayton, Doyle Clayton