In July, the Employment Appeal Tribunal (EAT) embarked on a three day hearing to determine whether employers should pay – and, historically, should have been paying – workers’ holiday pay based on their overtime earnings. The EAT has held that holiday pay should be calculated to include non-guaranteed overtime (overtime which the worker must work if offered). Today’s decision is a significant one for employers and, potentially, one which could have proven costly. 

Background

Today’s decision arises in the context of a wave of litigation involving holiday pay claims from both current, and former, workers. The Court of Justice of the European Union (CJEU) has determined, in Williams, that pay during annual leave should reflect normal remuneration. However, the rate of pay for each week of leave is currently determined by the Working Time Regulations (WTR) and the Employment Rights Act 1996 (ERA), the wording of which exclude overtime for holiday pay calculation purposes if there are “normal working hours”, unless it is compulsory and guaranteed. Consequently, the issue arises of whether the method of calculating holiday pay currently provided for by the WTR is compatible with the Working Time Directive (the Directive). If not, then amending legislation would be required.

The claims have been brought as unlawful deductions from wages claims. The time limit for such claims is normally 3 months from the pay day which includes the shortfall in wages. However, in relation to a series of deductions, it becomes 3 months beginning with the last deduction in the series. If a claim is not brought within that period, then there will be a consideration of whether time should be extended if it was not reasonably practicable to bring the claim earlier. 

ET decisions

The EAT heard combined appeals in Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others.

In Fulton, the Employment Tribunal read the WTR as excluding a provision of ERA in calculating holiday pay so that it could include overtime and other components of pay. In Neal v Freightliner, which has since settled and was not therefore heard by the EAT, that same goal was achieved by the Employment Tribunal deciding to read additional words into the WTR so that the relevant provisions of ERA would apply to determine the amount of a week’s pay for holiday pay purposes, “unless the rate of the worker’s pay as so determined is less than would be the case if it were determined in compliance with... the Directive as interpreted by the CJEU, in which case a week’s pay should be an amount that complies with the Directive.” In Amec, the Employment Tribunal also read words into the WTR.

The varying decisions in these cases are an example of the approaches the employment tribunals might take in interpreting the WTR purposively in order to give effect to the Directive, and demonstrate the urgent need for appellate authority to provide some certainty and consistency.

Arguments before the EAT

The main points argued before the EAT included the following:

  • properly construed and understood, Williams had no concern with overtime, but rather was concerned with payments for inconveniences that arose from the performance of job duties; 
  • it is not possible to construe the WTR so as to bring them into line with what EU law requires, as there are limits on the courts’ ability to interpret legislation “purposively”; 
  • the significant practical impact a finding for the claimants would have for employers, not least in terms of the financial costs; and 
  • whether there could be a “series of deductions” when incidences of underpayment were interspersed with incidents of proper payment of holiday pay. The argument run before the EAT was that there is a break in the series of deductions every time a worker takes leave that is not part of the four weeks paid annual leave required by the Directive. If the worker is taking their statutory “additional” leave, or purely contractual leave, there will be no need to calculate holiday pay in a manner consistent with the Directive. The argument is that a payment, albeit at the lower, existing rate, in respect of additional or contractual leave, breaks the series of deductions. 

EAT decision

The employers lost on their main arguments, as the EAT held both that holiday pay should be based on typical average pay to include non-guaranteed overtime and that it could interpret the WTR as being compatible with the Directive. This means that holiday pay will need to be calculated to include non-guaranteed overtime and similar payments in the future, at least for the twenty days’ leave provided by the Directive, which the EAT distinguished from the 8 days’ additional leave provided by the WTR.

However, the judgment holds positive news for employers as regards back payments as claims in respect of back pay will not be possible if there has been more than three months between payments in which there has been a shortfall.  The EAT held that a series “punctuated” by a gap of more than three months is a series for which the tribunals have no jurisdiction, subject of course to an extension of time being granted. 

The EAT also held that payment for “additional” leave, which it indicated would be the last to be agreed upon during the course of a leave year, cannot form part of the series of deductions which the worker can claim, so decreasing the likelihood of employment awards for back payments of holiday pay going back years.

How does this impact on commission?

It is important to note that the issues relating to overtime are different to those relating to commission, the subject of which has already been raised before the CJEU. In relation to commission, we already knew that commission payments can fall within the concept of normal remuneration and therefore should be taken into account when calculating holiday pay. The main outstanding issue in relation to commission is therefore whether employment tribunals are prepared to re-interpret the provisions of ERA purposively. As regards commission therefore, if employment tribunals are prepared to uphold claims based on Lock, on the basis of a purposive interpretation of the WTR, then, subject to any appeal, employers would face  exposure for historical claims. If not, then, again subject to any appeal, the historical element of those claims might instead become the liability of the Government for failing to implement EU law properly, though employers which are “emanations of the state” could face claims based on the Working Time Directive itself. 

Comment

Subject to any appeal, the EAT’s findings will significantly limit workers’ claims for back payments. Employers can breathe a sigh of relief that, for most workers, claims are unlikely to go back further than the current holiday year. The EAT’s decision also gives a clear indication of how the Lock litigation is likely to be approached early next year. Whilst a purposive approach in that litigation now seems almost certain, the impact of the EAT’s decision on back payments is likely to dramatically simplify the remedy process. 

The Government will also be breathing a sigh of relief. Had the EAT found that it was impossible to interpret the Regulations compatibly, it is likely to have resulted in the Government having to “pick up the tab” for past liability, as the fault for failing to properly implement the Directive would have lain at its door. Further, the EAT’s decision as regards back payments may dampen cries for the Government to amend legislation urgently to prevent the possibility of employers having to make back payments since 1998.