The Employment Appeal Tribunal (“EAT”) has this week delivered a landmark decision in the cases of Bear Scotland Ltd v Fulton (and other co-joined appeals) that is likely to have far reaching implications for you.

When paying holiday pay, you must now take into account overtime payments and other allowances.  Further, your staff may be entitled to claim any underpayments of holiday pay although, reassuringly for you, the judgment restricts the scope for backdated claims.

Background

Under the Working Time Regulations (“WTR”), a worker is entitled to be paid for any period of annual leave at the rate of a “week’s pay”.  These EAT cases focused on what should be taken into account when calculating a “week’s pay”.

Overtime

The first issue for the EAT to decide was whether payments of overtime ought to be included when calculating a week’s pay for holiday pay purposes.  There was a distinction drawn between “non guaranteed overtime” (where a worker may be required to undertake overtime but there is no obligation on you to provide it) and “guaranteed overtime” (where you are obliged to provide overtime and to pay for it even if there is no work available).  The law provides guaranteed overtime should be taken into account when determining a week’s pay, and that position has not changed.  In these cases the EAT had to decide what should happen with “non-guaranteed” overtime.

In determining the issue, the EAT referred to a number of cases where guidance had previously been sought from the Court of Justice of the European Union (“CJEU”) (formerly the ECJ).  The CJEU’s general approach is that when “…considering paid annual leave…” “…workers must receive their normal remuneration for that period of rest.”

The CJEU has held that it is for the National Courts to assess the “intrinsic link between the various components which make up the total remuneration of the worker and the performance of the tasks which he is required to carry out under his Contract of Employment”.

That CJEU case quoted above involved pilots, for whom, the CJEU concluded that remuneration related to the personal and professional status of a pilot had to be maintained during paid leave as it amounted to “normal remuneration”.

The EAT Judge found that non-guaranteed overtime should be included when calculating holiday pay.  Putting it simply, the Judge commented: “…”normal pay” is that which is normally received”.  He found it a relatively easy conclusion to reach and one that he does not think has prospects of being successfully appealed.

Other payments

A separate issue the EAT had to resolve only applied in two of the cases that had been joined together.  Here, he had to decide if certain other allowances should also be taken into account for holiday pay purposes.

The first was a “radius allowance” that was paid to those whose commute was greater than eight miles.  The second was a “travelling time payment” paid for time spent travelling to work.

The Judge found that, like overtime, these allowances were not ancillary to their work or employment (unlike the cost of a train ticket or bus fare) and that they were normally paid to the employees. They were, therefore, directly linked to their work and should also be taken into account when calculating holiday pay.

Therefore, the current position is that payments that are normally paid should be taken into account for calculating holiday pay.  It would appear that “normal remuneration” will need to include supplements, commission, overtime, shift allowances and any other comparable payments.

The law in this area is notoriously complex, and these cases have only managed to add an extra layer of complexity.  The approach was always to average a worker’s pay over the preceding 12 weeks, however, even that rule is now called into question as being the correct application.

Statutory leave

The cases only focused on the WTR.  This implements the EU Working Time Directive that requires member states to offer 4 weeks paid leave (20 days) for full-time workers.  The WTR provides that the minimum annual holiday is more; 5.6 weeks (28 days).

As these issues only relate to the European Directive, it is thought that the decision only affects only the 4 weeks paid leave, not the additional 1.6 weeks leave under the WTR.

However, such an approach has many issues and difficulties.  How will you and your workers know whether the leave taken is the 4 week leave under the European Directive or the extra 1.6 weeks available in accordance with the WTR?  Is it right to have a 2 tier holiday pay system?

Backdated holiday pay claims?

The EAT also examined the scope for backdated holiday pay claims. Under the Employment Rights Act 1996 workers can claim holiday pay as an unlawful deduction of wages. Where there is a “series” of deductions the arrears could go back years provided that the claim is brought within three months of the last “deduction” in the series.

In order to provide certainty, and to ensure that claims are brought promptly, the EAT concluded that where claims are brought for a series of deductions there must not be more than a three month gap between any of the deductions. If there is then any of the earlier deductions (i.e. those prior to the break of more than 3 months) will be out of time and the claim limited to the more recent deductions.

For example, if your employee has been underpaid holiday pay (e.g. because overtime payments were excluded), and has taken, at least, one day’s holiday every month for the past 2 years, he/she could claim for the underpayment and go back the entire 2 year period.  In contrast, if your employee has taken 2 weeks holiday in April, and 2 weeks holiday in August (and both were underpaid), because more than 3 months has elapsed between April and August, only the deduction in August can be claimed (provided the ACAS early conciliation process is completed, the Tribunal fee is paid and the claim is issued within 3 months of the deduction in August (subject to any extension of time for early conciliation)).

Therefore, while looking forward, the EAT has concluded that you must take into account overtime (and other allowances) when calculating holiday pay.  Looking back, if there has been more than 3 months in any alleged series of deductions, the value of those historical claims will be limited.

What does this mean for you?

Essentially, if, in addition to basic salary, you make regular payments to your staff that are intrinsically linked to the work you require them to undertake, such as commission, overtime, allowances etc then these payments should be included when calculating their holiday pay.  In this situation, to continue paying basic salary only for leave will be in breach of the current law entitling your employees/workers to claim.

While that is the current position, it is thought that appeals are likely, so the position may change.  Appeals are likely to take many years to conclude, and any worker bringing a claim may find their case put on hold until these issues have been resolved by the higher courts.

While this decision may represent a significant cost implication, there is also the practical issue of having more complex holiday pay calculations that you need to consider.

There are likely to be some practical solutions available to you, including:

  • whether you need to take any action.  In view of the likelihood of an appeal, it might be sensible to make no changes to how you calculate holiday pay.  If so, you could consider creating a fund in the event that there are claims.  This assumes the ultimate position remains unchanged (noting, of course, that if this decision remains, the worker must not have more than a three month break in his holiday in order to claim for historic holiday pay);
  • your right to refuse a request for holiday and/or to dictate when staff take their holiday.  This means you could impose fairly draconian sanctions on your staff in order to try and avoid inflated holiday pay if overtime/commission payments are cyclical.  For example, if the period leading up to Christmas is busy and results in you paying overtime or commission, you could refuse holiday requests between January and March so as to avoid inflated holiday pay.  This would totally defeat the point of the WTR, as was raised by one of the employers pursuing the appeal;
  • how overtime is offered and paid.  However, caution is needed if this is likely to involve a detrimental change to terms and conditions; and
  • whether you ensure every worker has, at least, a three month gap at some point in their holiday throughout the year, so as to minimise the risk of a claim for historic holiday pay.

The implications of this decision will be different for every business so specific legal advice should be sought, especially if it involves a change or review of your contracts of employment.  This article is for information only and is not legal advice.  Should you have any queries or concerns, EmployLaw clients should contact their Dedicated Solicitor.