Readers will have seen our newsflash earlier this week on the EAT's decision in Bear Scotland Ltd -v- Fulton regarding the calculation of holiday pay. The decision has received widespread media attention, and its impact is potentially very significant for many employers. Employers are likely to want to review their current approach to calculating holiday pay in light of this decision, and seek advice on their potential legal and financial exposure and whether they should be taking additional steps to limit their exposure.

Background

Workers in the UK are entitled to a minimum of 5.6 weeks of paid holiday (including bank holidays) under the Working Time Regulations ("WTR").  That right implements the Working Time Directive ("WTD"), and also "gold-plates" it, since the WTD only requires that workers receive a minimum of 4 weeks of paid holiday, including bank holidays.

In 2002, the Court of Appeal confirmed in its decision in Bamsey -v- Albion Engineering and Manufacturing plc that, in most cases, holiday pay need not include a payment to reflect overtime pay that an employee has earned, unless that overtime is both guaranteed (i.e. the employer must offer it) and compulsory (i.e. the employee must work it, if it is offered).  As a result, staff who regularly work overtime often receive less pay during their holidays than they typically receive while working.

In 2012, the CJEU (Court of Justice of the European Union) handed down its decision in Williams & Others v British Airways Plc.  That decision suggested that holiday pay for the 4 weeks of holiday guaranteed under the WTD should correspond to the normal pay that an employee would receive while at work.  Strictly speaking, that decision related only to staff in the civil aviation industry such as pilots and cabin crew to whom specific legislation applies. 

However, earlier this year, in the case of Lock -v- British Gas Trading Limited, the CJEU concluded that the same principle applied to non-aviation sector employees under the WTD and required that holiday pay should include an element to reflect commission payments that the employees had missed out  on under the commission schemes in issue as a result of going on holiday (click here for our update on that case).  

Claims for underpayments of holiday pay may be made under the WTR, where the time limit for bringing such claims is three months from the date on which the relevant holiday pay should have been paid.  Alternatively, claims may be brought as claims for unlawful deductions from wages, in which case the employee can claim for a series of deductions, provided that the claim is brought within three months of the last in the relevant series of deductions.  It has until now been unclear how far back that series can go, with commentators typically suggesting that it is either limited to the last 6 years, or potentially extends to all underpayments in the same employment since the enactment of the WTR in 1998.

Bear Scotland Ltd & Others -v- Fulton & Others

The claimants in these three conjoined appeals each regularly worked overtime, and were paid additional sums for working those hours.  That overtime was "non-guaranteed", in that it was not guaranteed by the employer but it was compulsory on the part of the employees if it was offered.  In addition, in two of the three cases, the employees received additional allowances if they were required to travel for work purposes.  However, in all three cases, the employee's holiday pay consisted of basic pay only, and excluded the payments received in respect of overtime and travel allowances. 

The Claimants relied on Williams and Lock in asserting that their holiday pay  should include an element reflecting overtime pay and travel allowances.  The Respondents asserted that the principles outlined in Williams did not extend to "non-guaranteed" overtime.  They further asserted that, if the WTD did extend to non-guaranteed overtime pay, the UK WTR which sets out how holiday should be calculated would be incompatible with European law, so if the employees had a claim at all, it was against the UK Government for failing to implement the WTD properly.  The UK Government, intervening in the case, supported the respondents' argument that "non-guaranteed" overtime need not be included in the calculation of holiday pay but argued that, if that was wrong, the UK legislation could be interpreted consistently with European law, such that any underpayments for past holiday pay should be made good by the employers.

Decision

The EAT accepted the Claimants' assertion that payments that the Claimants received for "non-guaranteed" overtime should be reflected in the calculation of holiday pay for the 4 weeks of holiday guaranteed by the WTD (although not for the additional 1.6 weeks required by the WTR or other enhanced holiday offered by the employer).  It also accepted that the travel allowances should be included to the extent that they did not cover travel expenses, but reflected time spent travelling.  If the payments had been intended merely to cover travel costs such as train fares, the payments would not have to be included.

The EAT also concluded that the UK legislation could be interpreted consistently with European law, with the result that the Respondent employers were liable to pay the underpaid holiday pay to the Claimants.  The EAT achieved this result by rewriting the relevant part of the legislation.  Though somewhat unclear, the result of this rewriting appears to be that, in most cases involving "non-guaranteed" overtime or allowances, holiday pay for the 4 weeks of leave guaranteed by the WTD should be calculated by reference to the average of such payments received over the twelve weeks preceding the relevant leave.

Finally, the EAT examined the question of whether the underpaid holiday constituted a "series of deductions", such that the employees could claim underpaid holiday going back over a lengthy period.  In a novel decision, the EAT determined that, a gap of three months or more between underpayments would effectively break the series. The EAT also indicated (without deciding the point) that the first 4 weeks of leave taken in any leave year should be deemed to be the leave required by the WTD, and any additional holiday taken can be calculated under the normal principles of the WTR.  Employees who will be impacted by this decision are reasonably likely to have had a three month period in the last year where they did not receive holiday pay (because it was not taken) or the holiday pay they received did not constitute an underpayment because it was not part of the 4 weeks required by the WTD.  Based on the EAT's decision, that three month break would have broken the series of deductions and the employee would be unable to claim for underpayments prior to that point.

Appeal

It is important to stress that the EAT granted leave to appeal to the Court of Appeal, recognizing that this was an important issue.  The EAT acknowledged in particular that its decision in respect of what constitutes a series of deductions is a question which is arguable either way.  Therefore, although this decision provides further useful guidance on where the law may end up, it will be reconsidered by the Court of Appeal, and the position may change.

Comment

This issue is very significant to employers who pay "non-guaranteed" overtime and travel allowances of the nature in issue in this case, but which are not included in holiday pay. However, given the appeal to the Court of Appeal, we still do not have certainty as to how holiday pay should be calculated going forward, nor how large the historic liabilities will be. 

Furthermore, this issue extends beyond "non-guaranteed" overtime and the travel allowances which were at issue in this case.  In February 2015, the Employment Tribunal in Lock is scheduled to consider  how the CJEU decision in Lock (that commission payments should in certain circumstances be reflected in the holiday pay) should be implemented into UK law, and whether the UK WTR can be interpreted consistently with the CJEU's decision.  The Government has also announced the establishment of a "task force" of employer organizations which will examine how the impact of Bear Scotland may be limited.  

Recent reports suggest that claims for unpaid holiday pay have already been submitted to the Employment Tribunals on behalf of over 100 separate groups of employees.  It is likely that some of these claims will seek to extend the categories of payment which should be included in holiday pay, perhaps to include "voluntary" overtime (i.e. overtime which employees may choose not to work), other types of allowances, and possibly some types of bonus payment.  Employers who make such payments, but do not include them in the calculation of holiday pay, should seek advice on their potential exposure, and the options open to them in respect of it.