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On 4th November 2014, the Employment Appeal Tribunal (EAT) handed down judgment in the holiday pay appeal cases of Hertel (UK) Ltd v Wood and others, Bear Scotland v Fulton and Baxter and Amec Group Ltd v Law and others . In summary, the decision of the EAT will lead to higher wage bills for many employers going forwards, but limits the potential liability for back pay, which will no doubt present a welcome relief for employers.
In brief, many elements of pay which were often excluded from holiday pay must now 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 has elapsed between any such underpayments.
The Wood, Fulton and Law claims arose because of a conflict between UK and European law as to how holiday pay must be calculated and in particular whether employers must include elements of remuneration such as commission and overtime. The European Working Time Directive (WTD) entitles workers to 4 weeks’ leave but does not specify the calculation method for holiday pay. Under the Working Time Regulations 1998 (WTR), which implement the WTD, 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 and that calculation depends on a number of factors including whether or not a worker has normal working hours.
The effect of the provisions for a week’s pay is that many common elements of remuneration, such as bonus, overtime and commission are excluded from holiday pay. However, the Court of Justice of the European Union (CJEU) has repeatedly stated the need for normal remuneration to be given during holiday periods. In the 2011 case of Williams the CJEU ruled that
More recently, in the decision in Lock v British Gas, the CJEU held that in order for workers not to be deterred from taking annual leave, they must not suffer a financial disadvantage for taking leave and went on to restate the principle that holiday pay must correspond to normal remuneration.
The latest three claims focused on whether other types of remuneration, mainly overtime and some travel payments, should also correctly be considered normal remuneration and therefore be included in pay for annual leave. Two key decisions by the EAT were that:
The question of primary interest for many employers is that of how far back employees may be able to claim in respect of underpaid holiday pay. The answer to this depends on whether each instance of underpayment forms part of a ‘series of deductions’. The EAT held that there were two requirements for a series of deductions:-
Claims in respect of unauthorised deductions must be brought within three months. Therefore the series is broken if more than three months has elapsed between deductions. The EAT also held that the additional 1.6 weeks’ leave provided by the WTR will be the last leave to be taken in any leave year. In practice, 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 WTD and any subsequent WTR leave taken by an employee. Employers can therefore rest easy knowing that in the majority of cases claims for back pay should be limited to the current holiday year or even completely extinguished.
Crucially, employers need to work out what payments need to be included in holiday pay calculations, in other words, which payments made by the business constitute “normal remuneration” under the latest ruling, and apply those payments going forwards.
The ruling means that the 4 weeks’ leave under the WTD and the additional 1.6 weeks’ leave under the WTR can be paid at different rates (just the former including all payments considered part of “normal remuneration”). Employers may therefore also wish to consider their options in relation to the rate of pay offered for the different elements of annual leave. However, differentiating pay for the two types of leave may cause an administrative headache for some employers and, furthermore, it is quite possible that the Government will seek to remove the distinction between WTD and WTR leave in the future. The initial decision for employers, therefore, is whether to, for the time being, pay holiday at different rates or pay all leave at “normal remuneration” rate.
In the longer term, employers may wish to look at minimising liability for holiday pay by reviewing the way in which they structure working arrangements. Possible steps might include using agency staff to cover busy periods rather than offering permanent staff overtime, preventing holiday from being taken at particular times of the year, using voluntary instead of compulsory overtime and revising commission plans to schedule payments at a time which impacts less on the 4 weeks’ WTD leave.
If you have any queries as to what the recent decision may mean for your business and the practical steps you can take to minimise the impact, please do not hesitate to give Marie Horner a call on 01904 698616.
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