In the November 2014 edition of our UK Automotive Newsletter we discussed holiday pay and the cases of Williams and others v. British Airways plc (Case C-155/10), Lock v. British Gas Trading Limited (Case C-539/12) and Bear Scotland Ltd and others v. Mr David Fulton and others (UKEATS/0047/13/BI). Please click here for the full article.

Below is a refresher of the above cases and some updates on the current position.

Williams and others v. British Airways plc and Lock v. British Gas Trading Limited

These claims held that "normal pay" is to be paid during holiday and not just basic salary.

In Lock, it was also decided that commission determined with reference to sales achieved should be included in the calculation of holiday pay insofar as it was "intrinsically linked" to the performance of tasks under the worker's contract.

In Williams, it was decided that payments which are "intended exclusively to cover occasional or ancillary costs" arising at the time the worker performs the tasks are excluded from the calculation of holiday pay. Some allowances are therefore excluded.

These decisions led to many questions from employers about the calculations of holiday pay, when considering the various payments and allowances in place.

Bear Scotland Ltd and others v. Mr David Fulton and others

Following the cases of Williams and Lock, the Employment Appeal Tribunal (EAT) considered in Bear Scotland how overtime and certain travel-related allowances should be treated for the calculation of statutory holiday pay. The EAT made the findings set out below.

  • What constitutes "normal" (for the purposes of determining "normal pay") is not clearly defined, but the payments will have to have been made for a sufficient period to qualify as "normal". If there is no settled pattern of work, then an employer must take an average over a referenced period to be determined by national legislation.
  • There must be a direct link between the payment made and the work that the worker is required to carry out.
  • Where the worker's contract requires them to accept any overtime if requested (non-guaranteed overtime), this should be taken into account in holiday pay. The position regarding voluntary overtime was not clarified here; however, if an employee regularly undertakes voluntary overtime so that it becomes a settled pattern of work, it arguably should be taken into account.
  • A three-month break between periods of leave will break the chain in a "series of deductions".

This means that the scope of unlawful wage deductions claims for backdated holiday is limited as claims cannot go back beyond any three-month gap between underpaid holiday payments (see also our comments below regarding legislative developments).

Whilst the position remains far from clear, the table below indicates what is understood to be the current position following Bear Scotland.

Click here to view the table.

The prevailing view is that the payment of commission in holiday pay applies only to the four weeks, as under the WTD, not the additional 1.6 weeks, as under the Working Time Regulations (WTR) (Sood Enterprises Ltd v. Healy UKEATS/0015/12/BI). Additionally, the EAT in Bear Scotland suggested that it is for the employer to choose whether the leave taken constitutes part of the WTD four weeks or part of the WTR additional 1.6 weeks.

Legislative developments

In January 2015, in an attempt to limit the impact on businesses of the EAT's decision in Bear Scotland, the Government introduced regulations which capped backdated unlawful deductions claims at two years. The cap applies to claims brought on or after 1 July 2015.

Lock and others v. British Gas Trading Limited

We are likely to see further developments arising from the appeal of the Lock claim. This is due to be heard by the EAT on 8 and 9 December 2015. It is expected that British Gas will argue at the appeal hearing:

  • that Bear Scotland should not have had any bearing on the outcome in Lock. This is because in considering overtime it was necessary to refer to the definition of "a week's pay" in the Employment Rights Act 1996; however, this is not the case for commission and non-guaranteed overtime; and
  • that the EAT in Bear Scotland was wrong to conclude that domestic legislation could be interpreted purposively to give effect to EU law.

Food for thought for employers

  • Dealing with holiday pay in employment contracts
    Employers need to decide whether to amend contracts based on the above decisions to ensure they are including particulars which are sufficient to enable the worker's entitlement to be precisely calculated (in order to comply with the minimum terms required to be set out in writing by legislation). The alternative may be to outline the organisation's approach in a non-contractual holiday policy, at least until the uncertainties have been ironed out. If employers opt for this approach they should be mindful that this will probably be insufficient to comply with the legislation, but may avoid employees becoming contentious as they will recognise that the organisation is aware of the changes and is reflecting those changes in its calculations of holiday pay.
  • Pensions implications
    ​Pensionable salaries, as a result of Bear Scotland, could be higher than employers have previously accounted for. Where a pension scheme defines pensionable salary in relation to the remuneration due there is a risk of two claims from employees:
    • that holiday pay calculated on the basis of normal pay is legally due to be paid and should, therefore, have been fed into pension contributions; and
    • that the shortfall in contributions unfavourably impacted the value of their future benefits.

Employers could consider changing the definition of pensionable salary so that it is based on contractual salary or on remuneration actually received by the employee, thereby mitigating the above risk.

Future developments

In light of the pending appeals of the above cases and the general uncertainty remaining in this area, employers are recommended to seek specialist advice regarding calculation of their holiday pay.