As most readers will be aware from press coverage this week, we now have what seems like one of the most widely trailed employment judgments ever. The case, Bear Scotland Ltd and others v Fulton and others (UKEATS/0047/13BI), deals with whether a worker's holiday pay should include an amount to compensate him for overtime pay he would have received if at work (rather than on leave). We look in more detail at this case and its potential impact on employers.

Background

Holiday pay is a hot topic in employment law and an area of ever-developing case law. The general trend of case law, both within the UK and the European courts, has been to increase employees' rights in particular in relation to the ability to accrue holiday during sick leave and in respect of what has to be included when calculating holiday pay.

The majority of employers have historically based holiday pay on an employee's basic salary and have not included additional amounts for allowances, commission or overtime the employee would have received if working. This is in accordance with the Working Time Regulations 1998 (WTR), which do not generally require holiday pay to include anything other than basic pay. For employees whose pay varies by the amount of work done, their holiday pay is to be calculated by working out their average pay over a 12 week period with reference to pay for their normal working hours (ie not including hours worked as overtime).

The WTR are derived from the European Working Time Directive (WTD) and the European courts have held, in a number of cases, that holiday pay should be based on an employee's normal remuneration. They have held that this is wider than basic pay and covers any payments that are intrinsically linked with an employee performing his job.

Employees in the UK are entitled to four weeks' 'standard' statutory annual leave that is derived from the WTD (dealt with in Regulation 13 of the WTR) and a further 1.6 weeks' 'additional annual leave', which is a creation of UK law (dealt with in Regulation 13A of the WTR).

In four employment tribunal cases in 2013 and 2014 it was held that holiday pay should include an amount to compensate employees for overtime pay they would have received had they been at work rather than on leave. The employers all appealed. One of those cases subsequently settled but the others have now been heard by the Employment Appeal Tribunal (EAT), which gave its judgment on 4 November 2014.

The tribunal decisions caused concern for employers because there was a potential for employees to be able to claim retrospectively for shortfalls in holiday pay going back over a number of years.  This was on the basis that claims could be brought as unlawful deductions from wages claims. In such a claim, an employee only has to present his complaint within three months of the last of a series of deductions and there would be an argument that the relevant 'series of deductions' went back to the introduction of the WTR in 1998 or the start of the employee's employment if later.

We understand that 300 group claims for holiday pay are currently going through Acas early conciliation so this is an important issue.

The decision

All of the cases before the EAT involved employees who worked overtime on a regular basis. Their overtime was not guaranteed (in that they had no right to a minimum number of overtime hours in a given week) but their employers were able to require them to work overtime if it was available.

Whilst some innovative arguments were made by leading counsel acting for the employers, the EAT's decision followed the general trend of UK and European holiday pay case law: the EAT concluded that holiday pay should include an element for regular non-guaranteed overtime pay, as this was part of an employee's normal remuneration. The judgment does, however, appear to recognise that the position may be different if employees do not have a settled pattern of work involving overtime (ie if employees only work overtime infrequently).

The EAT also considered whether the WTR could be interpreted to give effect to the requirement that holiday pay must be at an employee's normal remuneration (including regular overtime). The EAT concluded that it could. This could be done by reading in to the WTR an exception to the normal calculation for the four weeks' leave derived from the WTD.

Whilst these parts of the decision were unsurprising, the EAT's decision on retrospective claims was more interesting. The EAT concluded that, where payments of holiday pay are more than three months apart, an employee cannot rely on a series of deductions to bring claims relating to underpayments of holiday pay more than three months before the most recent underpayment of holiday. This has the potential of substantially decreasing the risk of employers facing large retrospective claims.

Practical impact

Permission to appeal has been granted on all aspects of the judgment and we will have to wait and see if any of the parties lodges an appeal.  However, we consider it unlikely that the Court of Appeal would overturn the fundamental decision that holiday pay should include an element for overtime.  To do so would go against the grain of ECJ holiday pay case law.

Therefore the immediate practical impact of the decision is that employers who do not already do so should look at including an element in employees' holiday pay to compensate them for overtime pay they would have received if at work.  This will apply provided that the employees regularly work overtime so that it is seen as being part of their normal remuneration and should be done by including overtime pay in a 12-week average used to calculate holiday pay.  However, we recognise that large employers' IT systems may not immediately allow for this and such employers may have to consider risk mitigation strategies.

The welcome news from the case is that the right to increased holiday pay only applies to the four weeks' Regulation 13 leave (and not the additional 1.6 weeks 'additional annual leave' under Regulation 13A).  The suggestion in the case is that the first four weeks' holiday an employee takes in a year should be the Regulation 13 leave but that may be difficult for employers to work in practice, particularly if they have special arrangements applying to bank holidays.

The decision that employees cannot rely on a series of deductions to bring retrospective claims if there is at least a three month gap in underpayments is useful.  It may in many cases be possible for employers to escape retrospective claims and liability because they can identify a three month period in which employees did not take any holiday.  It has also been suggested that a three month period during which an employee only takes Regulation 13A additional leave might be sufficient to break a series of deductions.  However, on our reading, the EAT has not specifically decided this point.

The decision means that those employers who can do so may wish to act quickly in changing their practices and reviewing the holiday patterns of their workforces to establish which employees may be time barred from pursuing retrospective claims.

Potential future developments and unanswered questions

Given that permission to appeal the judgment has been granted, the issue is not yet settled.  In particular, there is a reasonable prospect of the Court of Appeal overturning the decision that there cannot be a series of deductions where underpayments are more than three months apart.  In particular, it would seem odd for an employee not to be able to bring a claim if the reason for the three month gap is that an employee has not taken any holiday in that period (meaning there is no scope for a deduction to have been made).

Additionally, there is an exception to the three month time limit if it was not reasonably practicable for an employee to bring the claim in time.  The judgment does not address whether an employee might be able to use this exception, perhaps on the basis that the law on this had not been decided at the time of the deduction.

In addition to the time limit points, the following areas remain unclear:

  • Voluntary overtime – the principle that employees' holiday pay should include an element for overtime pay is fairly straightforward if employees are regularly working overtime and their employer can require them to do so. However, the case does not deal with overtime that is genuinely voluntary on the part of an employee but is still paid. The likely answer is that holiday pay should include overtime if it is being worked regularly.
  • What is regular – whilst the decision states that employees who work regular overtime should have overtime pay treated as part of their normal remuneration, it does not deal with what 'regular' means. It is not clear whether it applies to an employee who only works overtime once or twice a year. For such an employee's overtime to be seen as part of normal remuneration would seem odd but, if an employer was to deal with this issue by including overtime payments in a 12 week average, he may end up having overtime included in his holiday pay depending on when holiday is taken. If employers do not want this unintended consequence they will have to be careful about how they implement any new processes.

Therefore whilst the case provides helpful clarity on the fundamental position and gives assistance to employers faced with retrospective claims, some questions remain unanswered and this may not be the final decision on this matter.

How we can help

For a number of our clients we provided a fixed fee audit of their holiday pay risk prior to receiving the judgment.  As will be apparent from this article, there are a number of unanswered questions and it is unlikely that there will be one solution that works for all employers.  In particular there are a number of issues for employers to consider both in relation to their tactical approach to potential claims and how to implement the decision through their pay systems (if at all).

We are therefore providing a fixed fee quote to a number of clients to provide a high-level view of their organisation's risk profile and the best tactical approach in light of the judgment.  This would involve you completing a questionnaire.  We would then review your response and have a strategic discussion with you on the best commercial approach for your organisation.