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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.

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