The Employment Appeal Tribunal (EAT) has today handed down judgment in the closely observed holiday pay appeals in Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others (the UK Holiday Pay Claims). DLA Piper acted for Bear Scotland. The decision of the EAT will lead to higher wage bills for many employers in the future, but the judgment significantly limits the potential for back pay liability.

The decision of the EAT is that many elements of pay which are currently excluded from the holiday pay of many workers must be included. However, any claims in respect of underpaid holiday pay in the past are only possible to the extent that no more than three months elapsed between any such underpayments.

The holiday pay claims arise because of an apparent conflict between UK and European law as to how holiday pay should be calculated and in particular whether elements of remuneration such as overtime and commission must be included. The Working Time Directive (Directive) entitles workers to 4 weeks’ leave but does not specify how pay should be calculated. The Directive is implemented in the UK by the Working Time Regulations 1998 (WTR). Under the WTR workers are entitled to 5.6 weeks’ leave and must be paid at the rate of a week’s pay for a week’s leave. The Employment Rights Act 1996 (ERA) sets out how to calculate a week’s pay; the calculation depends on a number of factors including whether or not a worker has normal working hours.

The effect of the week’s pay provisions is that many common elements of remuneration, such as overtime, commission and bonus are excluded from statutory holiday pay. However, in cases interpreting the Directive, the Court of Justice of the European Union (CJEU) has consistently stressed the need for normal remuneration to be maintained during the period of annual leave. In a 2011 case (Williams v British Airways) the CJEU ruled that (1) workers on annual leave should receive their normal remuneration and (2) normal remuneration entitled a worker to any payment which is intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment. The CJEU held that it is then left to the national court to assess the intrinsic link between the various components making up the total remuneration of the worker and the performance of the task he is required to carry out under his contract of employment. In a subsequent decision, Lock v British Gas Trading and others, the CJEU restated the principle that holiday pay must correspond to normal remuneration and held that commission must be included as otherwise the financial disadvantage suffered might deter workers paid on a commission basis from taking leave.

The UK Holiday Pay Claims concerned whether other types of remuneration, mainly overtime and some travel payments, should also properly be considered normal remuneration and therefore be included in holiday pay.  There were essentially three issues in contention in the EAT:

  1. Whether the elements of remuneration in question fell within the types of payment which the CJEU in Williams said should be included in holiday pay;
  2. If so, whether UK law could be interpreted in order to give effect to that; and
  3. If there had been any underpayment of holiday pay, what constituted a ‘series of deductions’ from wages and in particular whether the series was broken by the employee taking the additional 1.6 weeks’ holiday under the WTR. 

In respect of the three issues, the EAT held as follows:

  1. Non-guaranteed overtime (that is, overtime which the employer does not have to offer, but the employee must work if offered) is part of normal remuneration and must be included in holiday pay, as must any other payments which form part of normal remuneration including shift allowances and comparable payments;
  2. It is possible to interpret UK law in such a way as to produce that result; but
  3. Payment for the additional 1.6 weeks’ leave given by UK law but not the Directive will ‘break’ the series of deductions in any case where there is more than three months between the employee taking the additional leave and taking Directive leave.

In respect of the first two issues, the EAT held that the decisions in Williams and Lock read together represented a settled view of the CJEU as to what payments are to be included in the calculation of holiday pay under the Directive and were a natural development from earlier case law, all of which referred to the requirement for normal remuneration to be paid during holiday.  It had to be presumed that in enacting the WTR the UK Government intended to implement the Directive fully and accurately.

The question of how far back the employees could claim in respect of underpaid holiday pay depended on whether each instance of underpayment formed part of a ‘series of deductions’. The EAT held that there were two requirements for a series of deductions; sufficient similarity to provide a factual link between the deductions, and a sufficient temporal link. On the basis that claims in respect of unauthorised deductions must be brought within three months, the series is broken if more than three months has elapsed between deductions. The EAT further said that the additional 1.6 weeks’ leave provided by the WTR Regulations (Regulation 13A leave) will be the last leave to be taken in any leave year. In practical terms, this means that claims for back pay will stop at the point at which there is more than a three month gap between the 4 weeks’ leave required by the Directive (Regulation 13 leave) and any subsequent Regulation 13 leave taken by an employee. This should mean that in the majority of cases the claims for back pay will be limited to the current holiday year, or in some cases completely extinguished.

What action should employers take now?

  • The immediate effect is that the 4 weeks’ leave required by the Directive (Regulation 13 leave) and the additional 1.6 weeks’ leave provided by the WTR ( Regulation 13A leave) are to be paid at different rates. This will cause some administrative headaches for employers and in the long run the Government may seek to remove the distinction between Regulation 13 and Regulation 13A leave; however, this is unlikely to be a legislative priority before the election. Employers will need to decide in the short term whether to pay the holiday at different rates or equalise up to pay all leave at normal remuneration.
  • Employers will need to consider precisely what needs to be included in the calculation of holiday pay ie what constitutes ‘normal remuneration’.
  • Many employers will need to decide how to deal with existing claims. Unions have already filed a substantial number of claims for underpaid holiday pay, which have been stayed pending the outcome of the appeal cases. The decision of the EAT may provide an incentive to settle claims, as the potential for back pay is now limited.
  • In the longer term, employers will need to look at how they structure working arrangements in order to minimise the increased liability for holiday pay. Options might include offering voluntary overtime instead of non-guaranteed overtime, using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime, revising commission plans to schedule payments at a time which impacts less on Regulation 13 leave and preventing leave from being taken at certain times of year.