EAT publishes holiday pay judgment

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The EAT has published its judgment in Bear Scotland and others on the important issue of whether overtime must be factored into holiday pay. As expected, the judgment has gone against the employers and in favour of the employees but the position on back pay claims is better than feared. In this update, we analyse the judgment and the immediate implications.

Background

In Bear Scotland v Fulton, Hertel v Wood and Amec v Law, the employees argued (in essence) that:

  • their holiday pay should be based on normal pay rather than on basic pay for the basic hours described in their contractual terms;
  • existing UK legislation on calculating holiday pay does not deliver a result which complies with EU law and should be (effectively) re-written by the courts to comply with EU law.

The cases were originally joined with the highly-publicised case of Neal v Freightliner but, when the Freightliner case settled, they were heard by themselves in July and August this year.

For more background, see our earlier article: where are we with holiday pay

Facts

In Bear Scotland v Fulton, the two employees’ actual working hours varied from week to week. The employees received overtime premia for hours over a fixed basic amount. They could not unreasonably refuse to work overtime and both worked significant amounts. They also both worked night shifts on a regular basis, for which they were paid a higher rate. They also received standby payments at a flat rate for being on standby and emergency call out payments if they were called out whilst on standby. The employees were paid holiday pay according to their basic day shift hours only.

In the Hertel and Amec cases, the employees were construction workers employed on a basic working week of 38 hours. Anything over 38 hours was counted as overtime and paid at a higher rate. They were obliged to work shifts (with associated allowances) and overtime as required. The actual shift pattern meant that the working week was around 44 hours. They received daily travel allowances and pay when travelling to sites more than 8 miles away, a fixed individual “productivity” allowance (paid for all hours worked but subject to removal if there was particular misconduct) and monthly payments based on team performance. When on holiday, the employees were paid holiday pay according to the basic 38 hour week at the relevant shift allowance rate and also received both the individual productivity allowance and the monthly team performance payment.

Judgment

In today’s judgment, the President of the Employment Appeal Tribunal found in favour of the employees and ruled that the courts should be interpreting the Working Time Regulations to ensure that workers received normal remuneration for holidays, without the need for the UK parliament to introduce new legislation.

The ruling only affects holiday entitlement derived from the Working Time Directive (‘Euroleave’) – that is, 4 weeks holiday a year.

The key issues and the EAT’s judgment on them

In the table below, we look in more detail at the EAT’s judgment. We summarise the key issues relating to the UK calculation of holiday pay and explain what guidance the EAT has provided.

Issue

EAT judgment

What is the legal test which holiday pay must meet?




 

The EAT judgment does not spell out a clear new test.

Instead, the EAT make clear that Euroleave must be paid at a rate which meets EU requirements.

The EU requirements are expressed in slightly different ways in various decisions of the Court of Justice of the European Union and Advocate General opinions.

The key requirement is that holiday pay for Euroleave must be based on “normal pay”.

The definition of ‘pay’ is broad and would cover any payment, allowance or supplement which is paid as a direct reward for tasks which the employee is required to do (i.e. the jobs they are required to do).

However, to be included in holiday pay, the pay must also be “normal”. As the EAT point out “there is a temporal component to what is normal: payment has to be made for a sufficient period of time to justify that label”.

Which types of overtime pay must be factored in to holiday pay?








 

Overtime which is compulsory for the employee and is regularly required– all pay for this overtime must be included

Overtime which cannot be unreasonably refused and is regularly required – all pay for this overtime must be included

Overtime which is voluntary but worked regularly - the EAT did not need to deal with this sort of overtime but we think that payments for such overtime are in the scope of “normal pay”.

Overtime which is voluntary, occasional and irregular – the EAT did not need to deal with this sort of overtime either, but we think there is a strong argument that it is out of scope – on the basis that it would fail the “normal” test.

Which allowances must be factored in to holiday pay?








 

The EAT judgment focusses on overtime, not allowances but it follows that any allowances which form part of normal pay must be included.

Expenses are out of scope.

However, on the facts, the EAT ruled that travel allowances and pay which were payable by Amec and Hertel to employees when travelling to sites more than 8 miles away were included. They were payments for time spent travelling, rather than for the cost incurred in travelling.

What about bonuses/commission?




 

Not addressed - but the CJEU in Lock v British Gas has already ruled that commission must be included in order to meet EU requirements. It therefore follows that payment for Euroleave must include commission.

The Lock case has been sent back to the Employment Tribunal in Leicester for a ruling on how to apply the CJEU ruling in practice and will be heard in February 2015.

What is the reference period over which you take an average?




 

The EAT has left in place the current provisions of the Employment Rights Act which (in summary) require payments to be based on average pay received over the 12 week period immediately before the holiday.

The judgment does not address the situation where this 12 week period is not representative of normal working and pay. This situation may come under sharper focus in the Lock case regarding commission.

Which days out of an employee’s overall annual holiday entitlement count as ‘Euroleave’?




 

No definitive ruling – only a comment.

The EAT suggest that Euroleave will be the first 20 days of holiday agreed in the holiday year (pro-rated for those working less than 5 days) - even if they fall on public holidays or company shutdowns.

The EAT also comments that the employer has the power to direct which days count as Euroleave. This may help going forward (but few employers will have done this in the past.)

The EAT disagreed with the Employment Judge in the Hertel & Amec cases who thought that the type of leave being taken was a matter for the employee to choose.

Can employees claim back pay?








 

Only to the extent that they can show a series of underpaid Euroleave with no gap of more than 3 months between underpayments.

If an employee brings a claim within 3 months of an underpayment for Euroleave, they can claim for any other underpaid Euroleave in the same self-contained series.

A self-contained series is broken by any 3 month gap between payments for Euroleave.

This could be a 3 month period which includes no holiday payments at all (because the employee took no holidays).

It could also be a 3 month period which includes holiday payments for other leave paid at the appropriate rate for that leave.

In other words, if you have made no payments for Euroleave in a three month period, you have extinguished any claims for underpayments before that period.

It is the payment dates which count, not the dates when holiday is taken.

How far back can claims go? (1998 or 6 years?)




 

Not addressed – the EAT seem to consider that the ruling on the 3 month gap means that back pay claims will never go very far back.

How far back a person can claim will involve a case by case analysis and many claims may even be out of time already.

Are tax and national insurance contributions due on any back pay?

Yes (but this was not addressed in the EAT judgment).

Are pension contributions due on back pay?

Potentially yes – if you would normally make pension contributions on all payments (but this was not addressed)

What next?

We summarise the immediate implications and add our comments below. For further support, a close look at the practical implications, the chance to discuss the response of UK industry to this ruling with your peers and to be updated on the Government’s latest response to the decision, book your place on one of our breakfast briefings.

First steps

This judgment will be widely reported in the national press and individuals will soon be assessing if they stand to benefit. If your workforce has not already raised the issue of holiday pay, they are likely to do so now. Companies already under union pressure to change how they calculate holiday pay will find the pressure increasing.

Some companies have already changed their approach to calculating holiday pay in anticipation of today’s judgment. Such companies may be in a position to respond to immediate workforce demands or questions by saying that they are already complying. (However, this does not necessarily mean there is no back pay liability – see below).

Other companies may wish to send ‘holding’ responses to any immediate demands or questions, stating that they are considering what adjustments to holiday pay might be required going forward.

Compliance from now on

The EAT judgment is binding and the compliant approach, if you are affected by the judgment, is to change how you calculate holiday pay from now on.

Unfortunately, we still do not know what a fully compliant approach to calculating holiday pay looks like. For example, just how ‘ad hoc’ do overtime or other variable payments need to be in order to be out of scope of what is ‘normal’? Which annual bonuses need to be factored into holiday pay? What is the correct way of calculating the element of holiday pay that relates to commission or a bonus? How do you square the way your payroll operates with the 12 week reference period? What if a 12 week period is not representative of ‘normal’ in your business?

You will need to decide what approach your business wants to take going forward. Importantly, do you want to include all variable payments in holiday pay from now on or take a ‘watch and wait’ strategy to any question marks whilst case law develops, for example in relation to ad hoc voluntary overtime? If you do change how you calculate holiday pay from now on then, whatever you decide to do about the question marks, our advice is to expressly reserve your right to re-calculate in future if the case law develops further.

There are many other difficult decisions to be made. Will you increase holiday pay for all annual leave or just Euroleave days? Does it help you to specify which days are Euroleave going forward? How will you do this? Will you consider changing certain parts of your employees’ pay packages in the future? How will you handle the administrative burden of working out the correct payment for a particular day of holiday?

Dealing with back pay claims

Whatever their approach to compliance from now on, companies may also face claims for back pay. We are aware of unions requesting detailed information about past payments in order to begin negotiations over back pay. In the light of the EAT’s decision on the three month gap, employers are now in a stronger position to resist back pay claims running into earlier holiday years, though exactly how far back an employee can go will depend on the individual pattern of leave that they have booked. We can expect unions/employees to formulate arguments aimed at extending the period of back pay entitlement.

Future appeals

Leave has been given for each party to appeal today’s ruling to the Court of Appeal. The Court of Appeal (or Supreme Court) could therefore overturn part or all of the EAT’s judgment. We think this is unlikely in respect of which payments ought now to be included in holiday pay (though we would welcome a clearer explanation of the test), but we anticipate that the unions will urge the courts to revisit the decision on back pay and breaking the series of deductions.

Some companies might choose to make no changes to the way they calculate holiday pay, pending the appeal outcome. Although such companies could be in breach of the current law, any tribunal claims would probably be ‘stayed’ (put on hold), so such companies are unlikely to be ordered to pay anything immediately.

Further support from EEF

EEF has been urging Government to do all it can to mitigate the potential impact on member companies. The Department for Business, Innovation and Skills will now bring the relevant Government departments together in a Taskforce, which EEF called for, to work with business to ensure a collaborative approach to dealing with relevant issues. EEF will represent your interests on this Taskforce.

In the meantime, we are holding a series of breakfast briefings - starting next week, to take a close look at the judgments and give you the chance to discuss the practical implications with your peers. For further details and to book your place, click here.

If you attended our recent seminar “Holiday and pay – end of the low cost holiday” then we will send you an updated version of the Table: which variable pay elements count towards holiday pay shortly.

Read EEF’s press release here and here.

Author

Legal Compliance Lead

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