Yesterday the Employment Appeal Tribunal (EAT) gave its hotly anticipated judgment on the calculation of holiday pay which has resulted in a lot of misleading press commentary and panic. Stop panicking.
Let’s set some context: under the Working Time Regulations workers can take 5.6 weeks paid holiday per annum. 4 weeks of that derives from the EC law behind our regulations and 1.6 weeks is extra negotiated between the Trade Unions and our government a few years ago. Traditionally the payment for that holiday has been calculated by most employers using basic salary averaging over a 12 week period. This is in line with the rules on calculating a “week’s pay” in the Employment Rights Act 1996 (ERA).
In recent times there has been a focus at European and UK level on what the payment should include and how it should be calculated: you may have seen the case of British Gas v Lock that confirmed that employees who earn commission should have commission included in their holiday pay calculation. This is because the Judges have confirmed that workers are entitled to be paid “normal remuneration” including any payments linked intrinsically to the performance of the worker’s tasks (Williams v British Airways plc  IRLR 948).
In the case of Bear Scotland Ltd v Fulton (yesterday’s judgment) the EAT confirmed that “normal remuneration” in this case included when calculating payment for the minimum four-week holiday entitlement under EU law, includes both guaranteed and non-guaranteed overtime – or in more normal language voluntary and compulsory overtime. Thus employers should now be factoring in overtime pay into their holiday calculations. This is because this overtime is intriniscally linked to doing the employee’s job.
Note however that this only applies to 4 weeks per annum not the full 5.6 weeks.
The EAT then went on to consider whether UK law (i.e. the WTR) could be read in line with EU law or whether the two were simply inconsistent. Accepting that it was obliged as far as possible to interpret UK law in light of the wording and purpose of the WTD, the EAT was prepared to read words into the WTR to achieve this result.
The EAT then went on to consider whether UK law could be read in line with EU law or whether the two were simply inconsistent. Accepting that it was obliged as far as possible to interpret UK law in light of the wording and purpose of the EU Directive, the EAT was prepared to read words into the WTR to achieve this result. Nevermind that that fundamentally alters how the ERA is to be read when calculating a week’s pay.
A key issue was whether or not employees are going to be able to claim arrears going back potentially to 1998 when the Working Time Regulations came in (if they had service stretching back that far) arguing that every time they’d been paid for holiday they had suffered an unlawful deduction from wages.
Crucially, the judgment, perhaps alive to the implications of this has limited the scope for workers to pursue historic claims for arrears of holiday pay. The EAT decided that claims alleging underpayment of holiday pay will be time barred if there was a break of at least three months between successive underpayments. A gap of more than three months means there can be no “series of deductions” from holiday pay, so tribunals will not have jurisdiction to hear such claims.
Given that the first 4 weeks holiday in any holiday year will be the holiday to which the right to overtime related pay will apply, lots of employees will given that we are near the end of the holiday year for most employers, be into the 1.6 weeks to which the right does not apply. Employers may therefore be able to massage the situation by perhaps monitoring the figures and the timing of holiday (perhaps even turning down some holiday requests) to give themselves 3 clear months, provided of course that they start paying holiday correctly going forward.
It is possible that there could be an appeal to the Court of Appeal (by the employers) , although the EAT expressed the view that it would not have a reasonable prospect of success.
The parts of the EAT’s judgment restricting the scope for retrospective claims are also very likely to be appealed (by the employees). So while these aspects of the ruling are helpful and comforting for employers, the EAT’s word is unlikely to be the last on the subject. There is still an ongoing risk of employers facing retrospective claims relating to previous periods of annual leave.
We suggest that it may still be premature for many employers to be entering into negotiations about backdated compensation for employees like John Lewis did recently – especially if they are non-unionised and in circumstances where employees may be unlikely to start stumping up the cash to issue employment tribunal proceedings.
The Government has already announced a review of this matter although query what they can do if this is determined by EU law.
Things to think about:
- review your overtime arrangements: are staff just putting in overtime unnecessarily? Would extra hours better be covered by temporary staff on basic hours or by permanent recruitment?
- audits the potential exposure now you know there is a 3 month window and the rules on 4 weeks/5.6 weeks
- consider a short moratorium on staff taking holiday eg:- in the lead up to a bank holiday to ensure your curtail historic claims
- consider whether you are going to start paying average overtime payments as part of holiday or are you going to wait and see what the outcome of any appeal is?
- what other payments you make to staff that are intrinsic to their work eg:- shift allowances, commission, productivity bonuses and other allowances to quantify what the extra cost would be each year if this was included in holiday pay