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Important Employment Law Update - Holiday Pay

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The Employment Appeal Tribunal has delivered its judgment on the linked cases of Bear Scotland v Fulton and Baxter; Hertel (UK) Ltd v Wood & Others; and Amec Group v Law and others, which deal with the calculation of holiday pay.

Some key points of the judgment are set out below, together with some guidance for employers on what the decision means for them.

Background

There have been a number of recent landmark cases on holiday pay. These stem from an apparent conflict between UK law and European Law.

The UK law on calculating holiday pay can be found in the Working Time Regulations 1998 (WTR) and the Employment Rights Act 1996 (ERA). In the main, the WTR and ERA set out that workers with normal working hours should be paid holiday at their basic rate of pay (i.e. commission, bonuses, overtime etc. are generally excluded from the calculation of holiday pay).

However, the WTR were enacted to implement the Working Time Directive (under EU Law) (the Directive). Recently, the Court of Justice of the European Union (CJEU) has interpreted the Directive as requiring workers to be paid their ‘normal pay’ during any periods of holiday, so that they are receiving a comparable amount when on annual leave as they would have done had they been at work for that period.

This has led to a conflict between European Law and how UK Law has previously been interpreted by our courts.

The Directive provides that workers must receive a minimum of 4 weeks’ holiday per year. The WTR provide workers with an additional 1.6 weeks’ holiday per year.

The Decision

The cases concerned whether certain payments (including overtime and certain allowances) should be included in holiday pay calculations.

The EAT made the following findings:

1. Non-guaranteed overtime (i.e. overtime, which is not guaranteed by the employer, but which the worker is obliged to work, if it is offered), should be included in the calculation of holiday pay.

The Judge noted that the recent case law from the CJEU had made it clear that, under the Directive, workers are entitled to be paid ‘normal pay’ during any period of annual leave and that such pay should include payments which have an “intrinsic or direct link to tasks which a worker is required to carry out”.

In these cases, the workers were required to do the overtime, so it would be perverse to hold that there was no such direct link.

2. Other payments, such as travel payments, shift allowances, fixed productivity allowances and performance based payments which are part of an employee’s ‘normal pay’, should also be included.

3. The above decisions are only applicable to the 4 weeks’ holiday provided by the Directive. The additional 1.6 weeks holiday required by the WTR can still be paid in accordance with how UK law has previously been interpreted (often at basic rate only).

4. It will be assumed, in all cases, that the first 4 weeks’ holiday in any holiday year will be the holiday due under the Directive (payment for which will need to include non-guaranteed overtime and allowances).

5. It is possible to interpret the WTR in such a way as to produce the above results. The EAT found that, as the WTR were specifically made to implement the Directive, it could be presumed that the intention of Parliament was to fulfil its obligation to do so fully and accurately.

6. An employee could claim back pay for holiday pay due under the Directive, but (save for in exceptional circumstances) only for a series of holiday pay deductions where there is no break of more than 3 months between them. Payment for the additional 1.6 weeks’ leave in accordance with UK law, will not form part of the series of deductions.

This decision potentially severely limits the ability of employees to claim back pay of holiday as any payment for the additional 1.6 weeks’ holiday will increase the chance of a 3 month break in the series.

What Does This Mean for Employers?

The EAT gave the parties leave to appeal the decision and it is likely that there will be an appeal. It may take years before we have a definitive view on this. Further, it has been announced that a government taskforce will be set up to assess the impact of the ruling which will consist exclusively of employer organisations. Clearly, the recommendations produced from such a taskforce are therefore, likely to favour employers.

However, in the meantime, employers may want to consider taking the following steps:

1. Try to determine what is included in each employee’s ‘normal pay’. What payments are intrinsically linked to the work they do and what payments are just one-off ancillary payments. Please get in touch if you have any questions on what sort of payments should be included.

2. Consider your risk in terms of claims for back pay, particularly if you have existing claims/complaints on the horizon. The likelihood of back pay claims will depend on when your employees have taken their holiday. We can assist with this exercise.

3. Consider whether you will pay holiday at different rates, and whether this is feasible in practice. One option is to include overtime and allowances in the calculation of holidays for all holidays. Calculate the increased cost of this and take this into account when looking at salary reviews etc.

4. Look at how you could reduce the increased cost going forward (e.g. change to genuinely voluntary overtime (i.e. where employees choose whether they would like to work any overtime offered), or use bank or agency staff to cover periods of increased demand to reduce overtime).

Commission Payments

On 22 May 2014 in the case of Lock v British Gas Trading Limited and Others the CJEU confirmed that the Directive required commission to be included in the calculation of holiday pay.

The EAT’s decision yesterday specifically relates to non-guaranteed overtime. The Employment Tribunal will still need to determine whether the ERA can be interpreted in line with the CJEU’s decision in respect of commission. It is anticipated that this case will be heard by the Employment Tribunal early next year.

Next Steps

We have advised a number of employers on the best strategy for their business to deal with holiday pay issues, including assisting them to budget for and mitigate against the potential costs.

If you'd like to discuss any HR issue, whether it's a steer on calculating holiday pay or any other work force issues, please contact Sarah Tahamtani, partner in the employment law team:

Sarah, 0113 336 3314 - sarah.tahamtani@clarionsolicitors.com,

We'd be delighted to help.