Case update (1): Holiday pay and news

holiday pay - deck chairWe updated you in our recent Newsflash Big news: Holiday pay and overtime on the recent decision of Bear Scotland Ltd and others v Fulton and others available here. We promised you some further detail on this case and so here it is.

Summary:

Does European (EU) law require that overtime (and other payments additional to basic salary) be included in the calculation for holiday pay and can UK law be interpreted to include such requirement?

Yes, says the EAT, specifically in relation to overtime which is not guaranteed by the employer, but which the employee is required to work if requested to do so, and which they do in fact regularly work (i.e. non-guaranteed, non-voluntary overtime).

Please note that, in any event, compulsory, guaranteed overtime is already taken into account under the Working Time Regulations (WTR) and should already be reflected in holiday pay.

Facts:

The above decision involved several conjoined cases: Bear Scotland v Fulton & others, Hertel v Wood and Amec v Law. In these cases the employees argued that UK law on calculating holiday pay under the WTR does not comply with EU law and therefore that UK law should be re-written in order to rectify this – i.e. their holiday pay should be based on normal pay rather than just on basic pay.

In Bear Scotland v Fulton & others the employees’ actual working hours varied from week to week. They received overtime premia for hours worked above a certain fixed amount. They could not unreasonably refuse to work overtime. In fact, the employees did work significant amounts of overtime. They also both worked night shifts on a regular basis, for which they were paid a higher rate. They also received standby payments at a flat rate for being on standby, and emergency call out payments if they were called out whilst on standby. They were paid holiday pay according to their basic day shift hours only.

In Hertel v Wood and Amec v Law the employees were construction workers. They were employed to carry out a basic working week of 38 hours. Anything over 38 hours was counted as overtime and paid at a higher rate. They were obliged to work shifts (with associated allowances) and overtime as required. The actual shift pattern meant that the working week was around 44 hours. They received daily travel allowances and pay when travelling to sites more than 8 miles away, a fixed individual “productivity” allowance (paid for all hours worked but subject to removal if there was particular misconduct) and monthly payments based on team performance. When on holiday, they were paid holiday pay according to the basic 38 hour week at the relevant shift allowance rate and also received both the individual productivity allowance and the monthly team performance payment.

The employees brought Tribunal claims on the basis that their holiday pay should have been calculated to take into account not just the basic hours worked in the week but also the extra shifts and overtime.

The decisions made at Tribunal were appealed and these appeals were conjoined   and heard together by the EAT.

Questions dealt with by the EAT and its decisions:

Q. Is it possible to read UK law (the WTR) to give effect to the EU law requirement to include non-guaranteed, non-voluntary overtime in the calculation for holiday pay of EU law?

A. Yes. This was to be expected, because judges are used to applying a creative interpretation to UK legislation when they want it to comply with EU law. That decision means that employees can bring a claim against their employers for underpayments – as our own national legislation can be read such that non-guaranteed, non-voluntary overtime payments should be included in holiday pay calculations.

Q. How should overtime and other payments be included in a calculation for holiday pay? For example, what reference period should be used to calculate average earnings if they vary from week to week?

A. Unfortunately the EAT decision did not really give any guidance on this point and there is no prescribed formula from the EU either.

In respect of calculating average earnings if they vary, employers are used to using a reference period of 12 weeks before the holiday (as set out under the Employment Rights Act 1996). However, it is now not clear if that is the appropriate reference period to comply with EU law if it is not considered to be representative.

It may be that an appropriate reference period will need to be determined on a case-by-case basis, as it is arguable that, if overtime payments fluctuate widely during the year, a 12-week period may not be representative. In this case it is not inconceivable that Tribunals would find a way to read words into the WTR to enable a more appropriate reference period to be substituted.

It is possible that more light will be shed on this issue when the previous ECJ decision of Lock and British Gas which dealt with commission (see our guidance on this here) is considered by a Tribunal, which is expected in February 2015.

Q. Should a requirement to include overtime and other payments in holiday pay apply only to the basic EU right to 4 weeks’ holiday, or to the full 5.6 weeks given under the UK’s WTR?

A. The decision was that this should apply only to the basic 4 weeks’ holiday entitlement provided under EU law.

Employers may continue to pay basic salary in relation to the additional 1.6 weeks provided under the WTR. However, we appreciate that such an approach might well provide an administrative headache.

Likewise, any additional holiday entitlement that you may provide to your workforce above and beyond the statutory entitlement of 5.6 weeks can still (as the law now stands) be calculated on basic rate pay, subject again to the question of whether an employer would want to operate such a complex holiday pay calculation.

Q. How far back will employers’ liability for historic underpayments of holiday extend?

A. A claim for underpayment of holiday pay under the WTR must be brought within three months of the underpayment.

However, such a claim can also be brought separately as an unlawful deduction from wages claim under the Employment Rights Act. In this case, the claim must still be brought within three months of an underpayment, but it can include a long series of previous similar underpayments where they have occurred for the same reason, so long as the claim is brought within 3 months of the most recent underpayment in that series.

This means that an unlawful deduction from wages claim could cover historic underpayments of holiday going back many years. It is not even clear whether the usual civil claims limitation period of six years would apply, and so potentially claims could go back as far as the introduction of the WTR in 1998.

This was the most concerning aspect for employers before the decision was announced. Many employers felt that they could change their holiday pay calculations going forward if necessary, but a vast bill for underpayments going back 16 years was a bleak prospect.

The EAT’s decision is that holiday pay claims can be brought as unlawful deductions from wages claims and therefore an employee can treat several deductions in a row as a “series” and bring a claim for that entire series.

However, an important and welcome aspect of the EAT’s decision is that an interval of more than three months between underpayments in such a series will “break the chain” of the series and prevent the claim from reaching back prior to that break.

In light of the above decision, an employer’s precise amount of liability for back pay towards each employee will depend on their individual pattern of annual leave and whether there has ever been a gap of 3 months or more between underpayments.

Importantly (and this is where it gets even more complicated), this decision also makes a distinction between the 4 weeks’ EU holiday on the one hand, and the 1.6 weeks’ extra holiday under the WTR (plus any additional contractual holiday entitlement) on the other hand, very significant when analysing how far back a series of underpayments may go. In each year, whenever an employee was taking part of their WTR 1.6 weeks or additional contractual holiday entitlement (rather than their 4 weeks EU entitlement), then they would have been paid correctly for that particular holiday period. Therefore, for that period there was no deduction from their wages, meaning that such a period can count towards a three-month gap which would break the series of deductions.

So, a complex but highly useful point for employers to take account of when assessing risk and liability.

All holiday back pay claims brought in Tribunals will currently now be scrutinised for the presence of any 3-month gap between underpaid holiday payments, which will ‘break the chain’ in terms of how far back the holiday claim can go.

It does add to the administrative headache, though, as employers will have to trawl through records to establish the three month gap between underpayments in each case, which will also need to factor in whether the employee was taking their 4 weeks’ basic EU holiday entitlement at the time or their additional 1.6 weeks’ WTR (and/or additional contractual entitlement) on the days in question.

What next for this case?

This EAT decision may well be appealed, although according to a report on WSB’s website, Unite has announced it is not going to appeal. Nonetheless, an employee could always seek to overturn the Bear Scotland in a future case, so we should not yet treat the subject as settled.

If there is an appeal, the points established above could change. We think that it is unlikely that any appeal would overturn the essential decision that non-guaranteed, non-voluntary payments should be reflected in holiday pay. However, what could well be overturned is the decision that a three-month gap breaks a series of deductions – indeed, the EAT itself admitted that this could be open to challenge and that it was an issue of “public importance”.

In the meantime, these overtime cases, and the previous decision of Lock (see above) will now be sent back to the original Tribunals which dealt with each case, who will make decisions of how much historic holiday pay to award in each case. This will involve them deciding the basis for the calculation to be performed – this should give us some guidance on how the calculation should work.

The same day that the judgment came out, the Business Secretary Vince Cable announced a Government task force to look into the above decision in more detail and how its impact on businesses can be limited. So there may be new legislation in due course to deal with the point. (See our recent Newsflash Taking Holiday Pay to Task)

Implications:

Q. Should we change our holiday pay approach?

A. At first sight, this decision establishes clear principles with regard to the calculation of statutory holiday pay in respect of overtime. These will be binding on Tribunals, unless or until the Court of Appeal overturns any aspect on appeal.

Simply put, this means that from now on, holiday pay should be calculated to include non-guaranteed overtime (and similar payments), at least for the basic entitlement of 4 weeks’ leave per annum required by the EU’s Working Time Directive.

If these are the only payments you pay in addition to basic salary and they are so regular that it is clear what normal earnings are, (without averaging earnings over a reference period) then it should be fairly straightforward to go ahead and amend your holiday pay system accordingly. However, make sure you expressly reserve your right to re-calculate in future if the case law develops further.

Given the chance of this decision being appealed soon, or overturned in a future case, and given the chance that the Government taskforce may make legislative changes, then if your situation is as straightforward as the above scenario, you may choose to make no changes to the way you calculate holiday pay currently, and wait to see what happens. Although you would be in breach of the current law as it stands today, any Tribunal claim would probably be ‘stayed’ (put on hold) for now, while the situation remains so unclear, so you would be unlikely to be ordered to pay anything immediately. However, if this is your chosen course of action then it would be advisable to calculate (at least roughly) what your on-going liability is for the potential shortfall in holiday pay so that you can budget for any future need to make up the difference. Then, if the law remains as it is, at least you will already have made plans to be able to finance the shortfall.

Importantly, though, if you are likely to have a large historic liability then do consider complying right now with the EAT decision for calculations going forward, in order to add as much time as possible between the last underpayment and any future potential Court of Appeal decision overturning the EAT decision that a three-month gap breaks a series of deductions.

Q. Should we calculate our potential liability for back pay?

A. If the number of employees is relatively small, or if the system of holiday records is sophisticated enough to allow you to perform the calculation easily, then you may want to consider making a rough calculation of your potential liability now.

A good place to start will be to review your holiday records to see how far back you need to go to find a three month interval when an employee did not receive the ‘correct’ holiday pay. Remember that bank holidays may form part of an employee’s basic EU 4 weeks’ holiday entitlement. The sticky issue of distinguishing between the 4 weeks and the additional WTR 1.6 weeks may make this difficult, but for some employees it may be clear cut.

Then you will need to work out roughly what you think the underpayments were. Although we only have a definitive decision on non-guaranteed, non-voluntary, overtime, for a “worst case scenario” calculation we would suggest that you assume that any and all regular additional payments may end up being included in holiday pay.

For the purposes of a rough calculation, we would advise that you apply a calculation based on average earnings over the established 12 week period preceding the holiday.

Q. What should we do if we receive a Tribunal claim/s?

A. Should you receive a Tribunal claim, our view is that the Tribunals are likely to stay them pending any appeal to the Court of Appeal (and onwards). Therefore should you receive a claim we recommend writing to the Tribunal requesting that the claim is stayed pending these decisions.

If you do receive a claim then and you would like our help in responding to this please do not hesitate to contact Luke Menzies at or 0845 113 0150 or any other member of the team.

Q. What should we tell our staff?

A. As you are no doubt aware, this decision has been widely reported in the national press and employees will soon be trying to work out if they stand to benefit.

If you are one of the employers which has already changed its approach to calculating holiday pay then you may be in a position to announce this to your staff. However, of course, even then you may face tricky questions in respect of back-pay.

If you are one of the many employers which is not yet sure of what action to take, you may wish to explain to your workforce that you are of course aware of the recent case law, but as the legal position is not yet finalised in relation to all the circumstances relevant to your staff’s holiday entitlement, you are still considering what adjustments to holiday pay might be required going forward.

However, if you believe that any announcement from your organisation risks alerting your employees to the fact that they may have been underpaid in the past, you may wish not to raise the issue at all until there is legal certainty.

Further advice

You would have seen in this newsletter that we are putting on a seminar on the subject of annual leave and holiday pay – follow this link to book.

Given the complexities of the law in this area, if you are concerned or want a further explanation of how the law may affect your organisation or you, please do not hesitate to contact Luke Menzies at or 0845 113 0150 or any other member of the team.