Where are we with holiday pay

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As the issue of holiday pay gathers more steam, we take this opportunity to summarise the current state of the law, the UK Government’s position and EEF's advice.

Background – what is the issue?

Under the Working Time Regulations (WTR), workers are entitled to 5.6 weeks’ statutory holiday made up of:

  • 4 weeks EU entitlement (Euroleave) derived from the Working Time Directive (WTD),
  • 1.6 weeks UK entitlement.

Many companies also provide contractual holiday on top of the minimum statutory amount.

Whilst contractual holiday can be paid at any agreed rate, the WTR provide that each of the 5.6 weeks’ statutory holiday must be paid at the rate of a “week’s pay” as defined in the Employment Rights Act 1996 (ERA).

It is becoming clear that the adoption of the ERA definition of a “week’s pay” for the purposes of calculating Euroleave pay is incompatible with the requirements of the WTD, as interpreted by various recent decisions of the Court of Justice of the European Union (CJEU).

Case law so far...

The leading CJEU case on holiday pay is Williams v British Airways, in which it decided that certain allowances paid to pilots should be included in their holiday pay, and that the pilots must receive “normal remuneration” for statutory holidays. “Normal remuneration” should, according to the CJEU, ensure that workers are in a position comparable in terms of pay to when they are working normally. Whilst this case considered statutory holiday pay under the Aviation Directive, the CJEU made it clear that the same principles apply under the WTD.

The UK employment tribunals have now heard various cases, in which employees, relying on Williams, have successfully argued that the ERA definition used for holiday pay does not provide the necessary “normal remuneration” for their Euroleave.

In Neal v Freightliner Ltd, the ET agreed with Mr Neal that his overtime payments should be included in the calculation of his holiday pay for Euroleave. The ET applied the principle that UK Regulations must be interpreted as far as possible in light of the wording and purpose of the relevant European Directive and read in words to the WTR to require the overtime payments to be taken into account.

Neal v Freightliner is being appealed to the Employment Appeal Tribunal (EAT). The appeal is due to be heard on 30/31 July, together with appeals in other cases which have been joined with Neal and which deal with similar issues on the inclusion of overtime and other allowances in Euroleave pay.

In Lock v British Gas, the CJEU ruled that, where a worker receives commission as a regular part of their pay, their Euroleave holiday pay should be based on their average actual earnings, including commission, and not simply their basic pay. The CJEU has referred back to the ET the question of how in practice to reflect the commission in the holiday pay.

Read our previous EEF case law updates for more detailed commentary:

What does this mean for holiday pay going forward?

The current position on holiday pay for Euroleave is unclear, with the WTR and the ERA at odds with emerging case law. Whereas there is now a binding CJEU decision in Lock on commission payments, we only have ET decisions on the inclusion of overtime and other allowances.

Our prediction is that Neal v Freightliner and the joined cases will ultimately go against employers and that most overtime (or at least regular or required overtime) will have to be factored into holiday pay for Euroleave. Certain types of overtime might escape inclusion, for example that which is genuinely occasional and demand-led or that unrelated to the worker’s normal job, but there are no guarantees that the higher courts will create sub-categories of overtime in this way.

We also predict that all allowances have to be included in Euroleave pay, with the exception of those intended to cover expenses and possibly those unrelated to the worker’s job.

Other difficult issues may also be considered as the cases progress through the higher courts. Questions to which there are no answers at the moment include:

  • For pay elements which fluctuate (e.g. where employees earn different amounts of overtime pay or commission each month), employers will probably need to pay an average amount for Euroleave – but over what reference period should the average be calculated? We think the starting point will remain 12 weeks, but this may need to be adjusted where it does not produce a “normal” figure.
  • Will bonuses have to be included in Euroleave pay and if so how can this be achieved? It follows from the decision in Lock that bonuses based on personal outcomes should be included in holiday pay if the employee could earn a greater bonus by not taking holidays. It is unclear if other bonuses should be included and, if so, how this could be achieved in practice.
  • Whilst liability premised on the WTD is limited to the 4 weeks Euroleave, how, in the absence of any laws setting out the order in which different types of holiday is taken, can employers identify which of the worker’s holiday is in fact Euroleave? In reality, the only safe approach is to adopt the same approach for all holidays, at least for the time being.

What is the potential exposure for employers?

Claims for underpaid Euroleave can be brought in an employment tribunal and could potentially go back as far as 1998 when the WTR were first introduced (or the date when the worker was first engaged, if later). This is because claims can be brought for a series of unlawful deductions from wages, where it seems there is no time limit on how far claims can go back.

Correct payments for Euroleave would break the series of deductions and prevent workers claiming for any Euroleave before the break. However, a “correct” payment for these purposes would have to be fully compliant with the approach now required by EU law.

To bring a claim for a series of deductions, workers must lodge their claim within 3 months of the last deduction made.

The possibility of county court claims is now being discussed amongst legal commentators. Until we have a definitive court ruling, nobody can say whether the county courts will accept jurisdiction. If they do, workers could bring claims in respect of underpayments in the last 6 years without needing to show a series. Such claims would be particularly attractive to past workers who left the company more than 3 months ago, for whom a series of deductions claim would be out of time.

Tax and national insurance contributions would be payable on back pay for employees and, if holiday pay is pensionable, employees may also be able to claim for underpayment of pension contributions.

In Neal v Freightliner, the issue of interest on past underpayments was raised and ruled out but we understand that it will now be part of the cross-appeal in the EAT.

Is your business affected?

If any of your workers have variable elements of pay, such as overtime, allowances, commission and bonuses, which are not included in holiday pay, you are at risk of claims.

To understand your exposure, you need to carry out an audit. This will involve looking at, for example:

  • What variable elements of pay exist within your business and for which types of worker
  • The risk that such elements should now be included in holiday pay
  • The potential extent of any “series” of past underpayments, including whether there are any periods of compliance

Possible Government intervention

Unfortunately, there is limited scope for the UK Government to “fix the problem” on holiday pay. If the UK approach under the WTR and the ERA on pay for Euroleave is in breach of EU law, the Government cannot preserve it.

Nevertheless, EEF has been lobbying the Government and urging them to do what they can to assist employers.

We understand that currently the Government are taking the following steps:

They have intervened in Neal and the other cases and joined as a party to the proceedings. This gives them the right to appear at the appeal hearing and support and/or bolster the arguments being put forward by Freightliner and the other employers.

They are considering joining as a party in Lock as well.

They are considering intervening in relation to back pay for employees (i.e claims for unlawful deductions from wages), and we are lobbying them to do this. However, their only realistic option is to introduce a 6 year time limit to series of deductions claims under the ERA as it is probable that any shorter limit would breach EU law.

They may in future specify which days of workers’ holidays count as Euroleave.

EEF is pressing the Government to try to address the problem of tax and NICs on employees’ back pay. It is possible that HMRC will make certain concessions, but we cannot be very hopeful of this.

EEF advice for employers

We advise all employers to conduct a holiday pay audit to establish whether and, if so, how badly your business is affected (see above). If your business is affected then, at some point, you will need to pay more for holidays.

You may decide to wait until case law provides further clarity before taking action. However, companies with significant exposure should also consider acting now, since this limits the risks going forward and may also (by stopping underpayments) put claims for a series of deductions out of time. (To bring a claim for a series of deductions, workers must lodge their claim within 3 months of the last deduction made.)

Of course, one of the difficulties is that nobody knows what a fully compliant approach to holiday pay looks like. You could adopt a pragmatic strategy based on existing case law. However, if your motivation is to try to break the series of deductions, you will need to consider a temporary overpayment approach to be sure that you have not continued any potential underpayment. Similarly, if you would like ultimately to distinguish between Euroleave and other leave, there is no safe way of doing this at the moment, so you will need to adopt a temporary approach.

Ultimately, it is a commercial decision for the business, and there is no single right approach for all companies.

Further EEF support

If you think you might be affected, please call your EEF adviser. They can explain the potential legal consequences of the case law for you.

Our seminars, Holiday and pay – end of the low cost holiday? take a comprehensive look at where employers currently stand on holiday pay. This includes guidance for employers on how to assess their potential exposure and an active debate of the pros and cons of the various strategies a company could adopt.

Some dates for the seminars are already fully booked but we are putting on extra events in some locations to deal with the high demand.

If you have recognised trade unions, our employee/industrial relations team can help you manage your communications with representatives and, if necessary, external officials. Please contact your EEF adviser for more details.

Our HR consultancy team is also providing support for employers, with consultancy products tailored for your business. This could include, for example, carrying out your holiday pay risk assessment audit and assistance on implementation and communication as you deal with any holiday back pay and changes to holiday pay going forward. 

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Legal Compliance Lead

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