Tag Archive: holiday pay

ECJ: A worker must be able to carry over paid annual leave when an employer does not allow him to exercise that right

The ECJ held today in King v The Sash Window Workshop that a worker must be able to carry over and accumulate rights to paid annual leave when an employer does not put that worker in a position in which he is able to exercise his right to paid annual leave. EU law precludes the requirement that a worker must actually take leave before establishing whether he has the right to be paid in respect of it. The decision could have a significant impact on the worker status claims currently making their way through the courts.

Mr King worked for The Sash Window Workshop on the basis of a “self-employed commission-only contract” from 1999 until he retired in 2012. When he took annual leave, it was unpaid. Following termination of his contract, Mr King sought to recover payment for his annual leave, both taken and not paid and accrued but not taken, for the entire period of his engagement. The Employment Tribunal found that Mr King was a worker and that he was entitled to payment in lieu of leave. On appeal, the Court of Appeal made a reference to the ECJ asking whether, in the case of a dispute between a worker and employer as to whether the worker is entitled to annual leave with pay, it is compatible with EU law if the worker has to take leave first before being able to establish whether he is entitled to be paid.

In today’s judgment, the Court notes that the right for every worker to have paid annual leave must be regarded as a particularly important principle of EU law. The purpose of that right is to enable the worker to rest and to enjoy a period of relaxation and leisure. However, a worker faced with circumstances liable to give rise to uncertainty regarding remuneration during the leave period is not able to fully benefit from that leave and such circumstances are liable to dissuade the worker from taking his annual leave. The Court notes that any practice or omission of an employer that might have such a deterrent effect is incompatible with the purpose of the right to paid annual leave.

The right to an effective remedy would not be guaranteed if, in a situation in which the employer grants only unpaid leave to the worker, the worker would be forced to take leave without pay and then bring an action to claim payment for it.

The Working Time Directive therefore precludes a situation in which the worker has to take his leave before establishing whether he has the right to be paid in respect of that leave.

The Court also concluded that EU law precludes national provisions or practices that prevent a worker from carrying over and, where appropriate, accumulating, until termination of his employment relationship, paid annual leave rights not exercised in respect of several consecutive reference periods because his employer refused to remunerate that leave.

The Court referred to its previous case law in the context of  workers who had been prevented from exercising their right to paid annual as a result of their absence from work due to sickness, according to which a worker who has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship is entitled to an allowance in lieu. In that context, in order to protect the employer from the risk that a worker will accumulate long periods of absence, and from the difficulties those periods might entail with regard to the organisation of work, the Court found that EU law does not preclude national provisions or practices limiting the accumulation of entitlements to paid annual leave by a carry-over period of 15 months, at the end of which the right is lost.

By contrast, in circumstances such as those in the present case, the Court considered that protection of the employer’s interests is not necessary  The Court therefore found that unlike in a situation of accumulation of entitlement to paid annual leave by a worker who was unfit for work due to sickness, an employer that does not allow a worker to exercise his right to paid annual leave must bear the consequences. The fact that an employer might consider, wrongly, that the worker was not entitled to paid annual leave is irrelevant.

As a result, in the absence of any national statutory provision establishing a limit to the carry-over of leave in accordance with the requirements of EU law, to accept that the worker’s acquired entitlement to paid annual leave could be extinguished would amount to validating conduct by which an employer was unjustly enriched to the detriment of the purpose of that Directive.

The judgment of the ECJ raises the stakes for employers who engage their workforce on a self-employed basis where there is a risk that they will be found to be workers. Where an employer has not made a facility available for workers to be able to take their paid annual leave (for example, where the employer denies the worker is entitled to paid leave), then any leave not taken would carry over to the next leave year, indefinitely, until the employee is permitted to take their accrued paid leave, or until termination. The two-year back pay limit under the Deduction from Wages (Limitation) Regulations 2014 does not apply in that situation as the claim is not for back pay but for payment due on termination.

However, the ECJ’s decision case does not explicitly deal with the situation where the worker has taken leave and not been paid. In such cases the existing rules in UK legislation and case law apply: the non-payment is a deduction, a series of deductions is broken by a three-month gap, and back pay is limited to two years.  There must be a risk, following today’s decision that these UK rules are incompatible with EU law, but it is unlikely that there could be a definitive ruling to that effect before the UK leaves the EU.

 

Permanent link to this article: http://www.dlapiperbeaware.co.uk/ecj-a-worker-must-be-able-to-carry-over-paid-annual-leave-when-an-employer-does-not-allow-him-to-exercise-that-right/

Holiday pay must include payment for any voluntary overtime normally worked

In the latest instalment to the litigation surrounding the correct calculation of holiday pay, the EAT has held that payment for voluntary overtime that is normally worked is within the concept of ‘normal remuneration’ and should therefore be taken into account in calculating holiday pay for the 4 weeks of holiday provided for by the Working Time Directive (WTD). This is the first binding decision in England and Wales on the issue of voluntary overtime.

In Dudley Metropolitan Borough Council v Willetts and others, the tribunal considered whether a number of different payments should be treated as forming part of a worker’s ‘normal remuneration’ for the purposes of WTD holiday. Each of the following elements was in dispute i) out-of-hours standby pay; (ii) call-out allowance; (iii) voluntary overtime; and (iv) mileage or travel allowance.

In this case, the claimants were employed in a number of different roles with set contractual hours. However, the claimants were also able to volunteer to perform additional duties which their contracts of employment did not require them to carry out. In effect, they could drop on, or off, a rota to perform on-call and additional overtime work as they so wished, essentially to suit themselves.

The employment tribunal had held that, in line with previous case law, when calculating holiday pay it was required to take into account anything ‘required of the claimant under his contract of employment which is intrinsically linked to the performance of the required tasks’ but that it could not take account of ‘occasional or ancillary costs’.

Applying this to the facts of the case, the employment tribunal had found that out-of-hours standby pay and call-out allowances did form part of the claimants’ normal remuneration and should therefore be included in holiday pay. In relation to voluntary overtime, the employment found that it formed part of normal remuneration for employees who undertook it regularly. For travel allowances, the tribunal held that any part of the allowance which is subject to tax as a benefit in kind would be part of normal remuneration. These findings were appealed to the EAT.

The EAT upheld the findings of the tribunal. It said that EU law requires that normal (not contractual) remuneration must be maintained in respect of the 4 weeks’ WTD leave – the purpose of this requirement is to ensure that a worker does not suffer a financial disadvantage by taking leave which is liable to deter them from exercising their right to take that leave. The EAT said that the ECJ had confirmed that for payment to count as ‘normal’ it must have been paid over a sufficient period of time and that this is a question of fact and degree. Normal remuneration would not include items which are not usually paid or are exceptional.

The EAT said that the test for establishing ‘ normal remuneration’ is not solely dependent on a link between pay and the performance of duties required by the contract of employment; it said that, if there is an intrinsic link, that is decisive of the requirement that it be included within normal remuneration. However, it is a decisive criterion but not the, or the only, decisive criterion. An absence of an intrinsic link does not automatically exclude a payment from counting, a position which it said is supported by the fact that payments personal to an individual such as those relating to seniority and professional qualifications count for normal remuneration purposes even though they are not intrinsically linked to the performance of the tasks that the worker is required to carry out.

The EAT went on to say that excluding payments for voluntary work normally undertaken would amount to an excessively narrow interpretation of ‘normal remuneration’ which would risk a worker suffering a financial disadvantage which might then deter them from taking holiday. In a case where the pattern of work – though voluntary – extends for a sufficient period of time on a regular and/or recurring basis so as to justify the description ‘normal’ it will need to be included in holiday pay. It will be for the tribunal to determine whether any such payments are regular and settled enough to amount to normal remuneration.

In the alternative, the EAT said that even if an intrinsic link was required, that link did exist in this case; without a contract of employment the arrangements for voluntary overtime would not exist. The EAT said that once an employee started working a shift of voluntary overtime they were performing tasks required of them under their contracts of employment, even if there was also a separate agreement.

In relation to call-out allowances, the EAT again upheld the findings of the tribunal that these were normal remuneration; it said that if the payments are normally paid they must be included in holiday pay to ensure there is no financial disadvantage to the worker as a result of taking the leave. For out-of-hours payments, the EAT again held these should be included in normal remuneration, emphasising that the focus is on normal remuneration, and not the normal working week. It repeated that whether a payment is normal is a question of fact and degree and that questions of frequency and regularity are likely to be relevant. The EAT had no difficulty with concluding that a payment is normally made if paid over a sufficient period of time on a regular basis, even if it is not paid very frequently. The EAT said that it did not accept that if workers have the opportunity to take annual leave in weeks with no overtime or out-of-hours shifts this would mean they were not deterred from taking holiday. A deterrent effect could be inferred from the reduction in remuneration itself.

Impact for employers

The outcome of this case is not surprising, following the recent trend in case law on the correct
calculation of holiday pay. However, its binding status as an appellate level decision, does also bring
some clarity to the issue of the inclusion of voluntary overtime payments in holiday pay.

Employers may still face practical difficulties with some payments, however, in determining whether,
as a matter of fact and degree, they do constitute ‘normal remuneration’ and, if so, in then determining the appropriate reference periods to make the relevant calculations.

Employers will also need to consider carefully how holiday pay is dealt with in the employment particulars required by section 1 Employment Rights Act 1996, which states that the particulars relating to holiday pay must be ‘sufficient to enable the employee’s entitlement ….to be precisely calculated’.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/holiday-pay-must-include-payment-for-any-voluntary-overtime-normally-worked/

Holiday pay must include results-based commission: Court of Appeal decision in Lock v British Gas

The Court of Appeal has confirmed in its decision today in Lock v British Gas that holiday pay must include a representative element of results-based commission. The Court did not comment, however, on whether the 12 week reference period adopted by the tribunal for calculating the commission element was correct in all cases, and indicated that there may be questions as to what is the appropriate reference period in any particular case.

The brief facts are that Mr Lock was employed by British Gas as a salesman, earning a basic salary of under £15,000 but with substantial potential for commission (generally up to 60% of his overall remuneration). During periods when he took annual leave, he was paid basic salary plus any commission earned in previous weeks which fell due for payment. On return from holiday, however, his remuneration would be lower as he had not had the opportunity to earn commission whilst absent on leave. He brought a claim for unlawful deductions from wages.

On a reference from the employment tribunal, the ECJ held that a worker is entitled to normal remuneration when taking annual leave and therefore should have commission included in holiday pay. The tribunal then held that the Working Time Regulations (WTR) could be read in order to give effect to the ECJ’s ruling. The EAT dismissed British Gas’ appeal. British Gas appealed to the Court of Appeal.

The Court of Appeal held that the court can and should interpret the Working Time Regulations as providing that Mr Lock is entitled to have his holiday pay calculated by reference to his normal remuneration, by requiring his commission earnings to be taken into account when calculating his holiday pay.

However, the vital question of precisely how commission (and other elements of remuneration) should be included in the holiday pay calculation was deliberately left unanswered by the Court. The effect of the tribunal’s decision in Lock was to imply a 12 week reference period prior to the period of annual leave, over which earnings should be averaged in order to calculate holiday pay, which the Court of Appeal approved in this case. However, the Court of Appeal did not comment on whether this was the correct reference period in all cases, and stated that “There may also be questions as to what, in any particular case, is the appropriate reference period for the calculation of the pay“. This leaves considerable uncertainty and suggests that the reference period may differ, not just according to the element of normal pay under consideration (commission, overtime or even bonus, as to which it remains unclear whether it is normal remuneration) but also according to the particular pay arrangements of the employer, or even individual employee. This could make the calculation and payment of holiday pay a huge administrative burden for employers, in addition to the increased wage bill which they will face.

The Court did state that the words read into the WTR by the tribunal were too wide insofar as they referred to all commission and not just results-based commission such as Mr Lock was entitled to.

This may not be the end of the matter: Sir Colin Rimer, giving the lead judgment in the Court of Appeal, said that his view on the answer to the central issue of interpretation had wavered, and British Gas has not yet indicated whether it intends to appeal to the Supreme Court.

Following the vote on 23 June to leave the EU, in the longer term it will be for the UK Government to decide what pay employees are entitled to when taking annual leave. We now understand that the UK is likely to leave the EU around March 2019. However, following Theresa May’s speech to the Conservative party conference in which she said that “Existing workers’ legal rights will continue to be guaranteed in law …. We’re going to see workers’ rights not eroded, and not just protected, but enhanced under this government.” it seems that reform of employment law may not be an immediate priority.

Actions for employers

This judgment is the latest instalment of the long-running debate over the correct calculation of holiday pay, but it is not the last word on the issue. Whilst it appears that the question of whether the WTR can be read so as to comply with EU law is settled (for now at least), a number of important issues still remain unresolved, not least how appropriate reference periods should be constructed to calculate correctly the commission payable in respect of annual leave. Whether other elements of pay such as voluntary overtime, bonus and certain allowances should be included in normal remuneration still has not been definitively ruled on by the courts. Employers should continue to keep their pay structures under review, taking legal advice in order to assess their holiday pay risks and how to minimise them.

 

 

Permanent link to this article: http://www.dlapiperbeaware.co.uk/holiday-pay-must-include-results-based-commission-court-of-appeal-decision-in-lock-v-british-gas/

EAT holds that UK legislation does allow commission to be included in holiday pay calculations

In March 2015, we reported on the outcome of the employment tribunal’s decision in Lock v British Gas Trading Ltd, one of the cases at the forefront of the litigation on how holiday pay should be correctly calculated. A reference to the ECJ had determined that results-based commission should be included in the calculation of holiday pay.

However, this was not the end of the matter. A number of live issues remained, including whether the UK’s Working Time Regulations 1998 (WTR) could actually give effect to this ruling. If not, the UK’s courts and tribunals would have to abide by UK law – which do not expressly provide for results-based commission to be taken into account – despite its incompatibility with the ECJ’s judgment.  This would arguably be in employers’ favour. However, the employment tribunal went on to find that the relevant regulations in the WTR could be modified to enable commission to be taken into account.  This point was appealed to the EAT and judgment has today been published.  Unfortunately, a number of issues still lack clarity.

The EAT has dismissed British Gas’ appeal, finding that as an earlier EAT in Bear Scotland v Fulton had recently decided that the domestic  legislation can be interpreted in a way which conforms to the requirements of EU law, it was going to follow that decision.  Although the EAT confirmed that it was not bound by the earlier decision, it said that in ordinary circumstances it could only depart from it in prescribed circumstances, none of which applied here. In particular, the decision in Bear Scotland was not manifestly wrong; neither were there exceptional circumstances justifying a departure from that decision in this case.

Impact

So where does this leave employers now? The employment tribunal found that the WTR should be interpreted to read with the following modification (shown in italics), which presumably now applies:

16(2)    Sections 221 to 224 of [the Employment Rights Act 1996] shall apply for the purposes of determining the amount of a week’s pay…subject to the modifications set out in paragraph (3).

16(3)    The provisions referred to in paragraph (2) shall apply-

            (e) as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221.

Section 221 ERA provides that where remuneration varies with the amount of work done, the amount of a week’s pay is the amount of remuneration for the number of normal working hours in a week calculated at the average hourly rate of remuneration payable in respect of the period of the previous 12 weeks. Presumably the average hourly rate for these purposes includes both basic salary and commission. The effect of the wording read into the WTR, therefore, is to implement a 12 week reference period.

Unhelpfully, however, it is not clear whether the wording proposed by the tribunal is completely settled; in particular, the tribunal had said that the issue of the reference period was to be determined at a later date. It is also not clear precisely how such a reference period would work, as commission paid in the 12 weeks before the calculation date will not be paid entirely in respect of hours worked during those 12 weeks; it may be necessary to average the pay over a different period.

Actions for employers

This EAT judgment is just the latest instalment of the long-running debate over the correct calculation of holiday pay. Whilst it appears today that the issue of whether the WTR can be read so as to comply with EU law is settled (for now at least), a number of important issues still remain unresolved, not least how appropriate reference periods should be constructed to calculate correctly commission payable; plus other elements of pay such as voluntary overtime and certain allowances have still not  been explicitly considered by the courts.  In addition, the restrictions on the limitation periods for bringing claims, established in Bear,  may still be open to challenge. Employers may not therefore be able to rest just yet, and should continue to keep their pay structures under review, taking legal advice in order to assess their holiday pay risks and how to minimise them.

UPDATE: 26 FEBRUARY 2016 – We understand British Gas has been given permission to appeal the EAT’s decision.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/eat-holds-that-uk-legislation-does-allow-commission-to-be-included-in-holiday-pay-calculations/

Calculation of holiday when workers change hours during the holiday year

The ECJ has today handed down its judgment in Greenfield v The Care Bureau Limited, a case which considers how holiday and holiday pay should be calculated where the worker has increased their working hours during the holiday year. The ECJ held that, in the event of an increase in the number of hours of work performed by a worker, Member States are not obliged to provide that the entitlement to paid annual leave already accrued, and possibly taken, must be recalculated retroactively according to the worker’s new work pattern. A new calculation must, however, be performed for the period during which working time increased.

Ms Greenfield was employed by Care Bureau from 15 June 2009. Her contract provided that working hours and days differed from week to week and the remuneration payable for any week varied according to the number of days or hours of work performed.  She was entitled to 5.6 weeks of leave per year. Ms Greenfield left Care Bureau on 28 May 2013. She took 7 days of paid leave during the final leave year, in July 2012. During the 12-week period immediately preceding that holiday, her work pattern was 1 day per week. From August 2012 Ms Greenfield began working a pattern of 12 days on and 2 days off taken as alternate weekends.

In November 2012 Ms Greenfield requested a week of paid leave. Care Bureau informed her that, as a result of the holiday taken in July 2012, she had exhausted her entitlement to paid annual leave. The entitlement to paid leave was calculated at the date on which leave was taken, based on the working pattern for the 12-week period prior to the leave. Since Ms Greenfield had taken her leave at a time when her work pattern was one day per week, she had taken the equivalent of 7 weeks of paid leave, and accordingly exhausted her entitlement to paid annual leave. Mrs Greenfield brought a tribunal claim arguing that national law, read in conjunction with EU law, requires that leave already accrued and taken should be retroactively recalculated and adjusted following an increase in working hours, for example, following a move from part-time to full-time work, so as to be proportional to the new number of working hours and not the hours worked at the time leave was taken. The tribunal made a reference to the ECJ.

The ECJ held that, in the event of an increase in the number of hours of work performed by a worker, Member States are not obliged to provide that the entitlement to paid annual leave already accrued, must be recalculated retroactively according to that worker’s new work pattern. A new calculation must, however, be performed for the period during which working time increased.

A change and, in particular, a reduction in working hours when moving from full-time to part-time employment cannot reduce the right to annual leave that the worker has accumulated during the period of full-time employment. It follows that, as regards the accrual of entitlement to paid annual leave, it is necessary to distinguish periods during which the worker worked according to different work patterns, the number of units of annual leave accumulated in relation to the number of units worked to be calculated for each period separately.

The same conclusion should be drawn where the leave is not taken during the period in which it accrued, in which the worker worked part-time, but during a later period in which he works full-time.

Where the worker, after accumulating rights to paid annual leave during a period of part-time work, increases the number of hours worked and moves to full-time work, the number of units of annual leave accumulated in relation to the number of hours worked must be calculated separately for each period.

In a situation such as that at issue in the main proceedings, EU law therefore requires a new calculation of rights to paid annual leave to be performed only for the period of work during which the worker increased the number of hours worked. The units of paid annual leave already taken during the period of part-time work which exceeded the right to paid annual leave accumulated during that period must be deducted from units accrued during the period of work in which the worker increased the number of hours worked.

The ECJ went on to consider how holiday pay must be calculated where the employment relationship is terminated. Workers must receive their normal remuneration for annual leave. With regard to a worker who has not been able, for reasons beyond his control, to exercise his right to paid annual leave before termination of the employment relationship, the allowance in lieu to which he is entitled must be calculated so that the worker is put in a position comparable to that he would have been in had he exercised that right during his employment relationship. It follows that the worker’s normal remuneration is also decisive as regards the calculation of the pay in lieu of annual leave not taken when employment terminates. Therefore, the calculation of the pay in lieu of untaken annual leave must be carried out according to the same method as that used for the calculation of normal remuneration. This means that if working hours have changed during the holiday year, different calculations may need to be performed for different periods.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/calculation-of-holiday-when-workers-change-hours-during-the-holiday-year/

Voluntary overtime and holiday pay

Kate Hodgkiss, a Partner in our Edinburgh office, comments: Voluntary overtime can, in principle, be included for the purposes of calculating holiday pay in Northern Ireland. That was the conclusion of the Northern Ireland Court of Appeal who delivered judgment in the Patterson v Castlereagh Borough Council (Patterson) on 26 June.

Employers in Great Britain should also be aware of the potential wide-reaching implications of this decision.  Although decisions of the Court of Appeal in Northern Ireland are not binding on the Courts in the rest of the UK it will undoubtedly be a highly persuasive authority.

Facts

Mr Patterson is employed by Castlereagh Borough Council on two concurrent contracts, one as a relief/casual worker and the other a full time contract of employment as an Assistant Plant Engineer. He alleged unauthorised deduction from wages in relation to holiday pay, in respect of both his relief/casual work and overtime work conducted under the full time contract of employment. Part of the employer’s defence was that this overtime was not compulsory, but overtime that Mr Patterson had volunteered to perform. Mr Patterson is the lead claimant in a multiple claim pursued against the Council.

At first instance, the Northern Ireland Industrial Tribunal ruled that the Working Time Directive does not require voluntary overtime to be taken into account when calculating holiday pay, relying on the Bear Scotland decision. This ruling was appealed on the basis that the Tribunal misdirected itself in applying Bear Scotland because that case made no findings on the issue of voluntary overtime.

The compulsory/voluntary overtime distinction

Since the Bear Scotland decision, a distinction has been made between “compulsory” and non-guaranteed overtime (which do count towards holiday pay) and voluntary overtime. The issue of voluntary overtime did not arise in the facts of the Bear Scotland case and so the issue was left undecided. Many employers have since sought to rely on this apparent distinction, to justify a different approach to calculating holiday pay in respect of compulsory and non-guaranteed overtime,  and voluntary overtime.

The decision

The Northern Ireland Court of Appeal concluded that the Industrial Tribunal was in error in relying on its interpretation of Bear Scotland. In principle there is no reason why voluntary overtime cannot constitute part of “normal” remuneration. The question of what constitutes “normal” remuneration is a matter of fact for the Tribunal in each case and should be assessed over a reference period. The reference period was not identified by the Northern Ireland Court of Appeal. Mr Patterson’s case was remitted to the Tribunal to hear further evidence of the overtime actually worked and to detemine whether it formed part of normal remuneration

Impact of the decision

Northern Ireland Court of Appeal decisions are not binding on Courts and Tribunals in England, Wales and Scotland. However, decisions can be cited as ‘persuasive’ and as employees and unions have been keeping a close eye on this case it will no doubt be seen as support for similar claims in the rest of the UK.

It is worth noting that voluntary overtime will have to be undertaken with sufficient regularity to constitute part of a worker’s normal working hours and there will hopefully be some practical guidance on this once the Patterson case is remitted to the Tribunal.

Limit on back pay

The decision in Patterson puts the issue of holiday pay firmly back in the spotlight at a timely moment as 1 July 2015 marks the introduction of the two year cap on back pay in holiday claims. Claims submitted after this date will only be able to claim a maximum of two years’ back pay , although in reality many claimants will only be able to claim for the current holiday year in any event. As the deadline draws closer, the Employment Tribunal Service predicts a short term spike in the number of claims lodged in the next few days as employees rush to submit their claims before the changes take effect.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/voluntary-overtime-and-holiday-pay/

Holiday pay: the verdict

The Employment Appeal Tribunal (EAT) has today handed down judgment in the closely observed holiday pay appeals in Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others (the UK Holiday Pay Claims). DLA Piper acted for Bear Scotland. The decision of the EAT will lead to higher wage bills for many employers in the future, but the judgment significantly limits the potential for back pay liability.

The decision of the EAT is that many elements of pay which are currently excluded from the holiday pay of many workers must 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 elapsed between any such underpayments.

The holiday pay claims arise because of an apparent conflict between UK and European law as to how holiday pay should be calculated and in particular whether elements of remuneration such as overtime and commission must be included. The Working Time Directive (Directive) entitles workers to 4 weeks’ leave but does not specify how pay should be calculated. The Directive is implemented in the UK by the Working Time Regulations 1998 (WTR). Under the WTR 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; the calculation depends on a number of factors including whether or not a worker has normal working hours.

The effect of the week’s pay provisions is that many common elements of remuneration, such as overtime, commission and bonus are excluded from statutory holiday pay. However, in cases interpreting the Directive, the Court of Justice of the European Union (CJEU) has consistently stressed the need for normal remuneration to be maintained during the period of annual leave. In a 2011 case (Williams v British Airways) the CJEU ruled that (1) workers on annual leave should receive their normal remuneration and (2) normal remuneration entitled a worker to any payment which is intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment. The CJEU held that it is then left to the national court to assess the intrinsic link between the various components making up the total remuneration of the worker and the performance of the task he is required to carry out under his contract of employment. In a subsequent decision, Lock v British Gas Trading and others, the CJEU restated the principle that holiday pay must correspond to normal remuneration and held that commission must be included as otherwise the financial disadvantage suffered might deter workers paid on a commission basis from taking leave.

The UK Holiday Pay Claims concerned whether other types of remuneration, mainly overtime and some travel payments, should also properly be considered normal remuneration and therefore be included in holiday pay.  There were essentially three issues in contention in the EAT:

  1. Whether the elements of remuneration in question fell within the types of payment which the CJEU in Williams said should be included in holiday pay;
  2. If so, whether UK law could be interpreted in order to give effect to that; and
  3. If there had been any underpayment of holiday pay, what constituted a ‘series of deductions’ from wages and in particular whether the series was broken by the employee taking the additional 1.6 weeks’ holiday under the WTR. 

In respect of the three issues, the EAT held as follows:

  1. Non-guaranteed overtime (that is, overtime which the employer does not have to offer, but the employee must work if offered) is part of normal remuneration and must be included in holiday pay, as must any other payments which form part of normal remuneration including shift allowances and comparable payments;
  2. It is possible to interpret UK law in such a way as to produce that result; but
  3. Payment for the additional 1.6 weeks’ leave given by UK law but not the Directive will ‘break’ the series of deductions in any case where there is more than three months between the employee taking the additional leave and taking Directive leave.

In respect of the first two issues, the EAT held that the decisions in Williams and Lock read together represented a settled view of the CJEU as to what payments are to be included in the calculation of holiday pay under the Directive and were a natural development from earlier case law, all of which referred to the requirement for normal remuneration to be paid during holiday.  It had to be presumed that in enacting the WTR the UK Government intended to implement the Directive fully and accurately.

The question of how far back the employees could claim in respect of underpaid holiday pay depended on whether each instance of underpayment formed part of a ‘series of deductions’. The EAT held that there were two requirements for a series of deductions; sufficient similarity to provide a factual link between the deductions, and a sufficient temporal link. On the basis that claims in respect of unauthorised deductions must be brought within three months, the series is broken if more than three months has elapsed between deductions. The EAT further said that the additional 1.6 weeks’ leave provided by the WTR Regulations (Regulation 13A leave) will be the last leave to be taken in any leave year. In practical terms, 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 Directive (Regulation 13 leave) and any subsequent Regulation 13 leave taken by an employee. This should mean that in the majority of cases the claims for back pay will be limited to the current holiday year, or in some cases completely extinguished.

What action should employers take now?

  • The immediate effect is that the 4 weeks’ leave required by the Directive (Regulation 13 leave) and the additional 1.6 weeks’ leave provided by the WTR ( Regulation 13A leave) are to be paid at different rates. This will cause some administrative headaches for employers and in the long run the Government may seek to remove the distinction between Regulation 13 and Regulation 13A leave; however, this is unlikely to be a legislative priority before the election. Employers will need to decide in the short term whether to pay the holiday at different rates or equalise up to pay all leave at normal remuneration.
  • Employers will need to consider precisely what needs to be included in the calculation of holiday pay ie what constitutes ‘normal remuneration’.
  • Many employers will need to decide how to deal with existing claims. Unions have already filed a substantial number of claims for underpaid holiday pay, which have been stayed pending the outcome of the appeal cases. The decision of the EAT may provide an incentive to settle claims, as the potential for back pay is now limited.
  • In the longer term, employers will need to look at how they structure working arrangements in order to minimise the increased liability for holiday pay. Options might include offering voluntary overtime instead of non-guaranteed overtime, using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime, revising commission plans to schedule payments at a time which impacts less on Regulation 13 leave and preventing leave from being taken at certain times of year.

 

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