The issue of how holiday pay should be calculated has been subject to much litigation and the Employment Appeal Tribunal (EAT) case of Bear Scotland Ltd & Others v Fulton and Others UKEATS/0047/13/BI has gone some way to resolve many of the uncertainties.
The European Court of Justice (ECJ) has already found that holiday pay must include:
- payments linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment; and
- payments which relate to the professional and personal status of the worker.
Accordingly, guaranteed overtime and commission payments earned on sales have been found to form part of a workers normal working duties and therefore payments for these duties are intrinsically linked to the performance of their tasks under their contracts.
However, there were a number of unanswered questions such as:-
- Should non-guaranteed overtime be included in the calculation of holiday pay?
- Do the rules apply to the 4 weeks of annual leave granted under the Working Time Directive or do they include the 1.6 weeks additional annual leave provided for under the Working Time Regulations?
- If the employer has failed to pay the worker the correct amount of holiday pay how far back can the worker claim back pay?
The Employment Appeal Decision
The decision in Bear Scotland and Others v Fulton and Others has answered these queries. The EAT held that:-
- workers are entitled to be paid their normal remuneration when taking annual leave. Regular non-guaranteed overtime should be taken into account when calculating their holiday pay and therefore a sum of money needs to be included to reflect the non-guaranteed overtime,
- the above rule applies only to the basic 4 weeks’ leave granted under the Working Time Directive, not the additional 1.6 weeks under regulation 13A of the Working Time Regulations,
- claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments; and
- travel time payments, which amount to additional taxable remuneration, should also be reflected when calculating holiday pay.
Implications for Employers
It is important to note that the EAT held that holiday pay should represent ‘normal remuneration’ of the worker. Accordingly, there must be a sufficient degree of regularity for overtime payments to count as ‘normal remuneration’. The term ‘sufficient degree of regularity’ is unlikely to include situations where a worker works overtime on an ad hoc basis.
Calculation of holiday pay
The judgment of the EAT provided clarification on how to calculate average pay to take into account non-guaranteed overtime for holiday pay. This was an issue for workers with no normal working hours, or with normal working hours but their pay varied according to amount of work done. In the case of Lock v British Gas Trading Ltd the Advocate General suggested that a 12 month reference should be used to reflect a workers normal working hours. However the ECJ did not agree with this approach. Instead it ruled that holiday pay must correspond to the worker’s “normal remuneration” and it is for the national court to work that out by taking an average over a reference period that is “considered to be representative”.
The EAT have now held that the 12 week reference period to calculate a weeks’ pay under the Employment Rights Act 1996 (ERA) was an appropriate way to calculate a workers average remuneration. However, this approach is likely to encourage workers to work as much overtime as possible before taking annual leave in order to increase their holiday pay.
Employers may wish to limit the amount of overtime available to workers generally, and in particular when they have annual leave pre –booked to avoid paying a higher rate than usual for their holiday pay.
Overtime payments only apply to the first 20 days of annual leave
Employers must ensure that they have the ability to monitor the amount of annual leave a worker takes. The EAT has clarified that the rule only applies to the 4 weeks leave granted under the Working Time Directive and not the additional 8 days leave granted under the Working Time Regulations. In order to avoid over-payment of annual leave, employers should ensure they have a system in place which notifies their payroll department that overtime payments should be excluded for holiday pay once a worker has taken 20 days leave.
Employers will also have to consider varying contracts of employment to reflect that holiday pay for the first 20 days will be calculated on a different basis than the remainder of their annual leave.
How much back-pay can workers claim?
The biggest concern is in connection with claims from workers for back pay. Claims by workers are likely to be presented as an unlawful deduction of wages. Under section 23 of the ERA claims based on a series of deductions must generally be brought in a tribunal within three months of the last deduction or payment in the series. However, the ERA does not specify how far back a claim for a series of deductions can go. Potentially workers could have claims that went as far back as 1998, which was when the Working Time Regulations came into force.
The EAT has now clarified the position and held that a tribunal has no jurisdiction to consider a claim if there had been a break of more than three months between successive underpayments. In other words if a worker was not paid the correct levels of holiday pay in April 2014 and October 2014 the worker would be prevented from issuing a claim for unlawful deduction of wages in respect of the April holiday pay as there had been a break of more than three months between the respective under payments.
However, employers should bear in mind that a tribunal may still consider a claim for back pay even if the claim is issued outside the 3 month limitation period if the worker can show that it was not reasonably practicable to issue a claim in time.
Although this was not addressed in the EAT judgment, it is also unlikely that workers will be able to avoid the limitation period of 3 months by issuing a claim in the civil courts. Workers may bring a civil action for sums due under a contract of employment, ordinarily the limitation period for breach of contract is 6 years. However, there is an argument that claims for an underpayment for the statutory 20 days annual leave are not a contractual issue but rather a statutory right under the Working Time Regulations. The Working Time Regulations provide that claims should be enforced in the employment tribunals subject to a 3 month limitation period.
Other payments that must be included in holiday pay
Less widely reported in the media, the EAT held that traveling time payments were also payments which were intrinsically linked to the performance of the tasks the workers were required to do and not an expense. Accordingly, these amounts should also be included in the calculation of holiday pay. This issue has particular importance to employers in the domiciliary care sector that pay workers a ‘travelling allowance’. These sums must now also be factored into the calculation of holiday pay.
Employers must consider whether workers receive any further regular payments that can be classed as remuneration. If so, consideration should be given to whether these payments should also be included in the calculation of holiday pay. If the additional regular payments can be viewed as payments that are intrinsically linked to the performance of the worker’s duties then it is likely that these payments should be included.
Is this the end of the debate?
Although it does appear that employers now have some certainty on how to deal with holiday pay, this is not the end of the story. The EAT has granted the parties the right to appeal on:-
- whether Article 7 of the Working Time Directive requires non-guaranteed overtime to be included in holiday pay,
- whether the Working Time Regulations can be interpreted to give effect to the Working Time Directive; and
- whether claims for holiday pay will be out of time if there has been a break of more than three months between successive underpayments
The EAT stated that it did not believe that the first two points had any real prospects of success but the last point was arguable. In view of this, it is likely that non-guaranteed overtime will continue to be included in the calculation of holiday pay. However, the question of how much liability employers face for claims relating to arrears of holiday pay is still uncertain.
For further information on how to mitigate against past or ongoing liability for arrears of holiday pay please contact Ronnie Tong or your usual contact in the Employment Team at Devonshires.