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MILS Legal Update: Holiday pay and overtimeBack

MILsBriefing Note – Employees succeed in holiday pay appeals: non-guaranteed overtime must be included

Few of you who have opened a newspaper or listened to the news in the last few days will have missed the latest developments on holiday pay.

On the 4th November 2014 the Employment Appeal Tribunal (EAT) handed down its judgment in the joint appeals of the Fulton v Bear Scotland, Hertel and Amec cases. The judgment confirms that workers have the right under Article 7 of the Working Time Directive (WTD) to be paid “normal remuneration” during their basic 4 weeks “EU leave” but not the additional 1.6 weeks under regulation 13A of the Working Time Regulations (WTR). Pay must therefore be based on typical average pay and not based only upon basic pay only.

This article looks at the EAT decision, gives an assessment of its projected impact on the motor industry and looks at the steps employers should be considering to assess and minimise their liabilities.

Why all the fuss?

Warning: This gets legal! It is however important for employers to understand why the law is shifting in this area.

Every worker in the UK has the statutory right to 5.6 weeks’ holiday each year, paid at a rate of a week’s pay for a week’s leave. If an employee works set hours and is only paid a basic salary with no overtime or other elements of pay, then the calculation of holiday pay is straightforward.

However, if an employee’s pay fluctuates depending on whether he or she is entitled to, for example, overtime or commission payments (something particularly prevalent within the motor industry) things get more complicated.

The historical thread on this legal point can be traced back to 2012, when the Court of Justice of the European Union (CJEU) and subsequent Supreme Court judgments in British Airways plc v Williams established that a worker must be no worse off financially during annual leave than if he/she had continued working. There is, otherwise, a disincentive to take leave.

This case ruling essentially meant that workers were entitled to receive their normal remuneration when taking their statutory holiday leave. This included not only basic salary, but also any other remuneration they receive that is “intrinsically linked to the performance of the tasks”.

This decision led to other cases exploring the limits of this ruling. First in Neal v Freightliner Limited, the Birmingham Employment Tribunal decided that holiday pay must include non-guaranteed overtime, whether compulsory or voluntary, where, as was the case in Neal, it was worked regularly.

The Tribunal also ruled that a worker could potentially claim for several years of underpayments on the basis that each failure to pay proper holiday pay formed part of an unbroken series of unlawful deductions from wages. For long-serving workers this could go back as far as 1998 when the WTR first came in. Employers held their breath and became increasingly concerned.

Similarly, in Fulton v Bear Scotland a Scottish Tribunal decided that a worker who regularly worked overtime as a matter of course was entitled to have that overtime reflected in his holiday pay and that standby and emergency call out duties should also be taken into account in the calculations.

Rounding off the ‘hat-trick’ came Wood and others v Hertel (UK) Ltd in which the Tribunal held that holiday pay should include overtime and productivity/performance bonus. Appeals were lodged in all three of these cases (albeit Neal settled during the summer) and so we have arrived at the decisions this week in the remaining cases.

Adding to the uncertainty in this area is another case which has been to Europe and back and which we are currently now awaiting the decision of (expected to be delivered in early 2015): Lock v British Gas Trading Limited. In that case the CJEU ruled that EU law requires a worker’s statutory holiday pay to take commission into account. The case has been returned to the Employment Tribunal for it to consider whether the UK’s legislation can be interpreted in line with that CJEU decision and, if so, how much holiday pay Mr Lock was entitled to. See previous briefings from the RMIF on this subject on the website.

Why did the EAT decide that non-guaranteed overtime must be included?

Mr. Justice Langstaff (President of the EAT) considered that the legal principles established in the aforementioned cases, Williams and Lock, taken together, represented the settled view of the CJEU as to the meaning of Article 7.

He felt the principles established in those cases applied equally to overtime payments and it was unnecessary to make a further reference to the CJEU. HHJ Langstaff observed that ‘normal pay’ is simply pay that is normally received by the worker. There is a time-based element to what is regarded as normal: payment has to be made for a sufficient period of time to justify that label. Where the pattern of work is settled, however, there is no difficulty in identifying ‘normal’ pay for the purposes of Article 7. He went on to dismiss many of the arguments from employers Counsel that overtime should not be included.

Contrary to the main press headlines it is also important for employers to note there may be some good news in the Judge’s reasoning. The decision may mitigate back-pay claims (a major fear for many employers, following the earlier case of Lock).

Key points of the decision:-

1. Workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments;

2. That applies only to the basic 4 weeks’ leave granted under the Working Time Directive, not the additional 1.6 weeks under regulation 13A of the Working Time Regulations;

3. Claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments (subject to the reasonable practicability test). See further below;

4. Travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

Significant finding that may assist Employers

Point 3 above contains the good news for employers, on the scope for backdated holiday pay claims under domestic law.

In the well known case of Revenue and Customs Commissioners v Stringer (2009) the House of Lords established that a failure to pay holiday pay under the Regulations can be framed as an unlawful deduction from wages contrary to S.13 ERA. A worker can bring a S.13 claim in respect of a ‘series of deductions’; in such a case, the claim must be brought within three months of the last deduction in the series – S.23 ERA.

It was widely assumed that this provision allowed claimants to link together a series of underpayments in order to bring a backdated claim, regardless of the length of time that had elapsed between each deduction.

HHJ Langstaff accepted that whether there is a ‘series’ of deductions is a question of fact, requiring a sufficient factual and temporal link between the underpayments. In a new development, however, he held that if there is a gap of more than three months between any two deductions in the chain, the ‘series’ of deductions is broken.

He reasoned that, since a tribunal has no jurisdiction to consider a claim brought more than three months after a one-off deduction or the last deduction in a series, Parliament could not have intended that jurisdiction could be regained simply because a subsequent non-payment, occurring more than three months later, could be characterised as having similar features such as to form part of the same series. This aspect of the judgment significantly restricts the scope for workers to claim arrears of holiday pay. Workers are not entitled to artificially designate holiday retrospectively as “EU leave” or “UK leave” so as to create an unbroken chain of deductions.

Immediate thoughts

Subject to any appeal, it is at this present time difficult to see the justification for now excluding overtime from holiday pay calculations. That will increase costs to business. The good news for employers is that the employers’ appeals succeeded in some respects in relation to the issue of limitation as set out above. The EAT held that if there was a gap of more than 3 months in any alleged series of deductions from wages, employment tribunals would lose jurisdiction to hear claims for the earlier deductions.

These conclusions may yet severely restrict the ability of workers to pursue retrospective claims which it had previously been feared could go back to the commencement of employment or the introduction of the WTR. This conclusion means unions and workers will not yield the windfall payments many were hoping for. The unions however will be reviewing the matter carefully with their Counsel, so we can’t say the issue is finally settled.

Furthermore, this is all still subject to appeal. The EAT refused to grant a reference to the CJEU, but gave permission to appeal to the Court of Appeal (stating that ground 3 was the most significant point for the Court of Appeal to consider).

Action points

While we wait for the Tribunal to reconsider Lock in light of the above rulings, employers should be now assessing the risk in their organisation and taking informed steps to mitigate any risk identified.

If you are not already looking at this, you may want to consider the following:

  • Carry out an audit of the different payments (e.g. commission, voluntary overtime, non-voluntary overtime, shift allowances and other premiums in pay) paid to workers in all parts of the business. You will need to assess the costs of increased holiday pay in the future.
  • Review contracts of employment, contracts of engagement and staff handbooks to check that they accurately reflect how holiday pay is currently calculated.
  • Carry out an audit of past holiday taken. This will help identify how long potential liabilities might go back for. It may be possible to assess how regularly employees have taken holiday to review the potential liability for back-pay claims.
  • Remember paid holiday leave is important to staff. If you receive a grievance, deal with it appropriately and bear in mind that an individual grievance could easily escalate and in a large workforce with people piggy-backing on an initial successful grievance, lead to a significant cost.
  • While the data needed to scope the potential liability clearly sits within your payroll and HR records, you need to bear in mind that you may not like what you find. Once you’ve gathered the information, you will be fixed with the knowledge and it will be disclosable in any litigation. A confidential risk assessment would seem sensible given the fact claims are being actively considered and pursued, as well as a joined up approach at board level, with finance and HR teams working closely together.

The main question for employers is whether they should be increasing holiday pay now to take into account this decision (and previously the decision of Lock re: commission). The law remains unclear in this area so it is not an area in which there is any definitively correct legal advice. Some employers are choosing to “wait and see” (pending further case law developments) and some are choosing to act now to increase holiday pay. Clearly, an assessment of the potential liability for past claims and an assessment of the increased future claims of holiday will need to be undertaken before any decision is reached.

Both of the active and the passive approach above have some merit. Those employers increasing holiday pay now may be able to further limit back pay claims given the three months’ time limit. Unfortunately, the precise means by which commissions and overtime should be averaged and assessed is still not 100% clear, so employers revising the schemes now do so somewhat in the dark as to whether eventual developments in the law will support their chosen method. Some believe averaging over the 12 weeks prior to any holiday (consistent with other U.K. legislation) will be correct, but in sectors where take-home pay can fluctuate widely, as in the motor industry, some employers are averaging over 12 months to avoid practical difficulties.

It is however increasingly difficult to argue, given the judgment of Lock and the cases this week, that basic pay is going to be sustainable and legal when calculating holiday pay going forwards. There remains however other uncertainties as to how the whole area could yet change. The decision could yet be overturned on appeal. What would happen if, for example, if the UK pulled out of Europe altogether? Unlikely yes, but certainly not impossible. Furthermore, many of you will have noticed that immediately after the decision on Tuesday 4th November, the Government has already set up a ‘taskforce’ to look into the decision and how to minimise the cost to employers. Whether or not that provides real assistance or is more of a ‘PR’ exercise remains to be seen.

Should members require further assistance on any of the points discussed above then please feel free to contact the RMIF legal advice line.

This advice is for general information only. Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.



Posted by Leana Kell on 07/11/2014