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Holiday pay – what are the options for employers following the latest decision?

29 February 2016

Employers will be disappointed that the Employment Appeal Tribunal (the EAT) dismissed the employer’s appeal in Lock v British Gas on 22 February. The EAT agreed with the Employment Tribunal, taking another EAT decision from last year - Bear Scotland v Fulton into account - that results-based commission should be included in holiday pay and that it was possible to add words into the Working Time Regulations so that they conformed with EU law. However, it is understood that the EAT has given British Gas permission to appeal. Although this means the Court of Appeal will consider all the issues afresh, given the European rulings it is doubtful that the Lock decision will be overturned. The appeal is unlikely to be heard before 2017 and in the meantime the uncertainty for employers continues.

The background

Under the European Working Time Directive (the Directive), workers are entitled to four weeks (20 days) paid holiday a year – a seemingly simple concept. The UK has implemented the Directive under the Working Time Regulations (WTR) which go further, and provide for 5.6 weeks (28 days) paid leave. Whilst the intention was that workers would get a week’s pay for a week’s leave, this has proved more complex than it sounds.

Under the calculations provided for by the WTR, elements of pay could effectively be excluded for some workers, such as commission and non guaranteed overtime. The European Court of Justice (ECJ) found that this could result in a serious reduction in pay for some when on holiday. As a result, these workers could be put off taking holiday, which in turn undermines the health and safety principles underpinning the Directive. The line of cases from Europe, and interpreted in the UK courts, show a steady movement towards including all elements of pay that are regularly made and “intrinsic” to the job.

Where are we now?

Whilst the Bear Scotland case relates to non-guaranteed overtime and travel time payments and Lock relates to results-based commission, similar issues arise in respect of productivity, attendance, performance and possibly other allowances (such as “acting up”), standby or call-out payments and potentially even to discretionary performance bonuses.

Additionally, voluntary overtime was not specifically dealt with in the Bear Scotland judgement, but it is likely that future tribunals will interpret it as forming part of normal remuneration if a settled pattern has developed over a sufficient period of time to justify the label “normal”. In fact, the Court of Appeal in Northern Ireland has given the view (which is not binding on UK Courts) that in principle, voluntary overtime should be included in holiday pay.

The upshot is that money paid regularly enough to be “normal” should be included.

Importantly however, this only applies to the four weeks holiday entitlement under the Directive, not the additional 1.6 weeks provided for under the WTR.

Back payments

The aspect of Bear Scotland that gives some comfort to employers is that claims stretching back to the introduction of the WTR will be difficult. The way for workers to make back claims is by way of a “series of deductions”, in other words a claim that each holiday payment had been missing an element and as a result each holiday payment formed part of a “series” allowing the claim to go back many years.

The EAT in Bear Scotland, however, found that a gap of more than three months between the deductions would break the series. Therefore, if there is a gap of three months or more between holidays, the back payments are effectively cut off. Additionally, the EAT implied that the 20 days entitlement under the Directive would be the first holiday taken in the year, which may also help employers as the payments relating to the additional 1.6 weeks are unaffected by this judgement and will (we anticipate) have been paid at the correct level, cutting off the series of deductions.

In response the Government introduced new regulations limiting back pay claims to two years in respect of claims made on or after 1 July 2015.

However, Bear Scotland has since returned to the Employment Tribunal and the claimants are seeking permission to appeal again to the EAT on an issue related to whether a gap of more than three months breaks the series of deductions.

Calculating pay

The reference period for calculating pay also remains unclear and no guidance on this issue was given in Lock. The WTR points to an average over the preceding 12 weeks prior to the holiday, but this can cause anomalies if holiday follows a particularly busy period, with significant overtime or where pay may be affected by seasonal factors, for example, Christmas periods. A 12 month period may be more appropriate (and was suggested by the Advocate General in Lock), but this will eventually be decided by the courts, or legislative change.

What should employers do?

In the short term, employers may want to consider practical arrangements to try to manage risk including:
accruing against the risk of claims;

  • continuing to maintain good records that detail periods of holiday taken and pay paid:
  • introducing terms into the contract to give greater control as to when holiday can be taken;
  • managing when workers are entitled to take holiday in order to engineer gaps of three months to restrict retrospective claims by refusing or deferring requests for leave; and
  • managing when workers are entitled to take holiday in order to prevent them from taking holiday after a period of significant overtime which might increase the normal average remuneration and therefore the costs of meeting the liability.

In the longer term, despite potential challenges, our view is that there is an obligation on employers to include normal remuneration in holiday pay. The risk, smaller now than before due to the 2-year limitation, of paying all elements of pay for holiday pay (and being wrong) may be one worth taking to try and extinguish the potential liability of many backdated pay claims.

Whilst the uncertainties remain employers should take action and consider their options which include:

  • to wait and see - await the outcome of appeals and further decisions;
  • to accrue - accruing against the risk of claims with a view to meeting those claims or seeking a negotiated settlement if and when necessary;
  • to make active changes – by including overtime (and comparable) payments in holiday pay to avoid future claims and break the chain in any alleged series of deductions, but this carries the risk of miscalculating the payments and even overpayment.

There will undoubtedly be further movement on this issue, but employers need to consider whether now is the time to make some changes to manage the risk, rather than wait for their hand to be forced. Employers should consider taking advice on their particular circumstances depending on their potential liability, the types and amounts of payments involved and the number of workers this may affect.

This article was written by Michael Powner. For more information please contact Michael on +44 (0)20 7203 5216 or at michael.powner@crsblaw.com