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GETTING TO GRIPS WITH THE HOLIDAY PAY CONUNDRUM

The Employment Appeal Tribunal's (EAT's) judgment in the Bear Scotland case is the latest in a series of cases considering what must be included in the calculation of holiday pay under the UK's Working Time Regulations (WTR). The ruling sent shockwaves through the business community, with some commentators estimating that around five million workers in the UK could be entitled to more holiday pay at a potential cost to companies of billions of pounds. Business Secretary Vince Cable even set up a taskforce to assess the possible impact of the EAT's decision. Adam Solomon and Sophia Berry throw the spotlight on the Bear Scotland litigation in the context of other decisions on holiday pay and consider its implications. This article first appeared in the March 2015 edition of Tolley's Employment Law Newsletter.

Recap of the law on holiday pay

European Union law requires that the pay received by workers during their holidays must be "normal” or "comparable” to that received while they are working. The Court of Justice of the European Union (CJEU) regularly reminds us that the Working Time Directive (WTD) is a health and safety measure. Workers must not, therefore, be discouraged in any way from taking their holiday entitlement.

CJEU judgments have made clear that payments that (i) reflect a worker's "personal and professional status” in a job; or (ii) remunerate a worker for tasks that he is required to carry out, must be included in the calculation of holiday pay.

However, Advocate General Bot in Lock v British Gas (Case C-539/12[2014] ICR 813 recognised that payments for tasks that are only required now and then by an employer are unlikely to constitute normal pay for these purposes. He suggested that "a certain degree of permanence” was required.

In Lock itself, the CJEU held that commission payments regularly received by a salesman had to be included in the calculation of his holiday pay. Those payments were considered to be "intrinsically” or "directly” linked to the performance of tasks under his contract of employment. The court found that only paying the salesman commission that he had earned in earlier periods during his leave infringed the requirements of the WTD. That is because the purpose of providing payment for annual leave is to put the worker in a comparable position in the leave period, as regards their salary, to periods of work. Otherwise, the adverse financial impact may deter the worker from actually taking that leave.

On the other hand, the UK Supreme Court has determined that payments that are genuinely designed to cover workers' expenses can be excluded from the calculation of holiday pay (Williams v British Airways [2012] ICR 1375). It should be noted that employers need not prove that the amount of the payment corresponds precisely to the expense and the courts will not examine the reasonableness of or need for the payment in detail.

The Bear Scotland litigation

The facts

In Bear Scotland and others v Fulton and others [2014] UKEAT 0047/13/0411, the employees' weekly working hours varied. They were entitled to be paid overtime premia for each hour they worked above a certain threshold and were obliged to work overtime if reasonably requested to do so. They were also entitled to a higher rate for night shift work, standby payments and emergency call out payments. In reality, the employees did do significant amounts of overtime and regularly worked night shifts. Their holiday pay was, however, calculated according to their basic pay for hours worked on day shifts.

In Hertel v Wood UKEAT/0160/14/SM and Amec v Law UKEAT/0161/14/SM — which were heard with theBear Scotland case — the employees were contracted to work a basic week of 38 hours, but were obliged to work overtime if that was requested of them. They were entitled to be paid at a higher rate for overtime and the shift pattern in place meant that the average working week was about 44 hours. They also received a fixed individual productivity allowance, a monthly payment based on team performance and daily travel allowances and pay for travelling to sites more than eight miles away. Their holiday pay was calculated on the basis of their basic 38 hour week at the relevant shift rate, the individual productivity allowance and their monthly team performance payment.

The EAT judgment

The EAT held that the regular overtime, which the employees had been required to carry out if requested by their employer, should be included in the calculation of their holiday pay. Overtime was worked on ELN March 2015, 38 at 39 a sufficiently regular basis that it formed part of the employees' normal pay. Langstaff J went to back to basics in defining "normal pay” as "that which is normally received” by the worker.

The travel allowances and payments for travelling to site received by the Hertel and Amec employees were also held to be directly linked to their work. They therefore formed part of the employees' normal pay for the purposes of calculating holiday pay in the view of the EAT.

How should we treat non-compulsory overtime?

The Bear Scotland decision only deals with what is essentially compulsory overtime. This raises the question of whether or not non-compulsory overtime should be included in the calculation of a worker's holiday pay. It is not clear whether the fact that, in practice, a worker undertakes some overtime or a particular amount of overtime work will be sufficient to satisfy the test laid down by the CJEU.

It seems likely that the courts would find that this type of overtime should be included in holiday pay calculations, because it is as directly or intrinsically linked to the worker's job as the commission payments were in Lock. It may be however, that non-compulsory overtime is worked less frequently by workers. Without a settled pattern of overtime, it will be more difficult to argue that such work constitutes normal pay.

Bonuses

A question raised by Lock is whether bonus payments must be included in the calculation of holiday pay. It could be argued that a discretionary bonus cannot be described as "normal pay” for a worker. If a payment is regularly made in practice however, the courts may decide that it should be included.

The appropriate reference period

In Lock, the CJEU said it was for national courts to establish the appropriate reference period to calculate a "representative” average of working hours for each worker. Advocate General Bot suggested that a 12-month period might be appropriate. That would certainly be more likely to produce a representative average, particularly in seasonal businesses like the retail sector with peaks and troughs of activity, than the 12-week period under the WTR.Lock is due to return to the employment tribunal in the next month for determination of issues such as the appropriate reference period for the calculation of average commission to be included in Mr Lock's holiday pay.

Scope for backdated claims

The EAT significantly limited the prospect of large backpay claims in the Bear Scotland case by ruling that such claims will not succeed if there has been a gap of three months or more between holiday underpayments.

The judgment distinguishes between the four weeks of holiday provided for by the EU legislation and the 1.6 weeks of additional leave that UK workers are entitled to under the WTR. It is only holiday pay for the former period that must be calculated in accordance with the CJEU case law. That will impact on how long a series of underpayments may be claimed for, as the period of WTR additional leave could count towards a three-month gap which would then break the series of deductions. The EAT considered that the dates of the additional leave would likely be the last to be agreed upon during the course of a holiday year.

The government has further limited the scope for back pay claims. It set up a taskforce to assess the impact on businesses of the Bear Scotland decision last November. It has this year announced that it will impose a cap of two years on unlawful deduction from wages claims in respect of holiday pay. The cap will, however, only take effect in respect of claims lodged in the tribunal on or after 1 July 2015. There may be a rush of claims brought prior to that deadline.

Employers' response

It will be difficult for employers to know how to respond to the EAT's decision. Employers would be well advised to carry out an audit, to assess what payments could fall within the "normal pay” definition, and so assess their potential liability. It could be that changing the basis of their holiday pay calculations favourably to all of their employees in advance of further adverse court decisions in this area will ensure that no claims are received within three months of the last holiday underpayment and they are therefore protected from any liability. However, it may be that to take that approach in respect of all employees, including those who only work overtime on a voluntary or an infrequent basis, puts their business at a severe competitive disadvantage.

Conclusion

The EAT concluded that its decision on the inclusion of overtime did not go "against the grain of the [national] legislation”. However, the Bear Scotland decision is evidence of the English Courts reinterpreting UK legislation in a radical manner in order to comply with the WTD (which is, of course, not directly binding on private employers).

There will no doubt be further litigation in this area. The EAT's conclusion that a three-month gap breaks the chain of deductions may yet be challenged, as it is one of the most controversial aspects of the decision. Also, there have been suggestions that workers could simply issue claims every three months to defeat this limitation.

The courts may also clear up some of the grey areas which have arisen as a result of this litigation, such as when overtime can be said to be sufficiently regularly worked so as to constitute normal pay. In the meantime, it must be hoped that the government taskforce will produce clear guidance for employers on the unanswered questions that remain in the area of holiday pay.

Posted: 17.03.2015 at 09:13
Tags:  Comments  Employment Law  Articles
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