Holiday pay allowances, overtime and commission the EAT - decision in the Bear Scotland, Hertel and AMEC cases

November 10, 2014

Introduction

On 4 November 2014 the Employment Appeal Tribunal (“EAT”) gave judgment in three cases, Bear Scotland v Fulton, Hertel v Woods and AMEC v Law, which concern the calculation of holiday pay. This briefing note follows our first note on this subject, in July 2014.

Overview

Only those who were abroad last week will have missed the publicity generated by this decision. However, it is important not to be carried away by this, and to view the decision in context.

First, this decision is simply the most recent in a long line of Court of Justice of the European Union (“CJEU”) and UK Tribunal decisions on this subject since the CJEU decided in 2006 that “normal remuneration” must be paid during annual leave. It is most definitely not the last word. Permission to appeal to the Court of Appeal (“CA”) has been granted, and will almost certainly be taken up. Further appeals to the Supreme Court and possibly to the CJEU may follow. It could be another year or more before this saga is brought to a conclusion.

Second, the EAT decision is entirely consistent with the CJEU’s approach over many years to the protection of  what is seen as the fundamental right of workers to take holiday, to the removal of any disincentive to taking holiday and to the remedy of any disadvantage suffered if they take holiday.

Third, the publicity has been overdone, and that is likely to be problematic for employers. Holidays are a key benefit for workers, and key benefits can easily become flashpoints. Misunderstandings and misinterpretations are likely, and employers may be faced with unmeritorious claims fuelled by the publicity (although it is to be hoped that the Employment Tribunal fee and the compulsory ACAS early conciliation procedure may dissuade some potential claimants). Piggyback claims may follow. All will have to be dealt with by employers faced with the usual choice between defending the claim and settlement.

Decision

The bad news for employers is that the EAT decided that normal remuneration by reference to which holiday pay is calculated must now include payments for overtime which the worker is required to work (but which the employer is not obliged to offer) and which is worked with a sufficient degree of regularity, ie non-guaranteed overtime. The Working Time Regulations 1998 (“WTR”) can be interpreted in this way and do not therefore require amendment.  (Note that guaranteed compulsory overtime must already be included in the holiday pay calculation for the entire 28 days’ statutory holiday.)

One piece of good news is that the EAT decided that this method of calculation is restricted to the 20 days’ statutory holiday required by the WTR and that employers are not required to calculate holiday pay in this way for the additional 8 days’ additional holiday also provided for by the WTR (nor for any additional contractual holiday).  There are obvious administrative issues for an employer if it seeks to distinguish between the two types of holiday.

Further good news, albeit qualified, is that the EAT decided that where there is a gap of more than 3 months between a payment of holiday pay at the incorrect rate and a subsequent incorrect payment, that prevents a worker claiming that the first payment was (and any previous payments were) part of a series of unlawful deductions. The qualification is that the EAT has granted permission to appeal to the CA on this point (and indeed on all the other points in the decision), but with an unhelpful (for employers) parting comment from the EAT that the point is arguable and of public importance.

Outstanding issues

What is the “sufficient degree of regularity” that will result in overtime forming part of a worker’s normal remuneration, and therefore the calculation of his holiday pay? Is there an argument that not every piece of ad hoc overtime falls within this category? Perhaps the CA will clarify this point. A settled pattern of work will allow normal remuneration to be identified easily: a regular requirement to work overtime, calculated over the relevant reference period (see below), will fall within the calculation. Ad hoc overtime which the worker is not required to work and which the employer is not required to offer and which does not form part of a regular or settled pattern may fall outside the calculation. The EAT did not have to decide this point. Where does the line between these two categories lie? Ad hoc overtime that does not have to be included in the calculation could easily morph into something more regular that does. Unhelpfully, that is likely to be a question of fact for an Employment Tribunal.

Over what period should normal remuneration be calculated? The Employment Rights Act 1996  provides for a 12 week reference period. Is this the correct period? The EAT believes this decision is within the competency of UK legislation, but there is a question over that. The CJEU requirement is that this should be calculated over a representative normal period. Could a longer period, say 12 months, be imposed?

Is the EAT correct in its decision that a 3 month gap between incorrect holiday payments breaks the sequence and prevents workers bringing retrospective claims for historic underpayments of holiday pay? This is perhaps the most important of these issues, as within it lies the risk of substantial additional costs for businesses.

Will the EAT’s decision that only the first 20 days’ holiday benefit from this method of calculation survive appeal to the CA, or will this be extended also to the additional 8 days’ holiday. That extension is unlikely.

Do workers have a possible breach of contract claim that will allow them to circumvent the limitation period for an unlawful deductions claim? Probably not, but unionised employers should anticipate a trade union trying this (perhaps arguing breach of an implied term that the employer will operate the contract lawfully?) if the 3 month limitation period survives the CA and any appeals beyond that.

The Government has established a taskforce to investigate ways in which the impact of this decision might be limited.

Lock and commission

Lock v British Gas is the next case in this area, and this now goes back to the Employment Tribunal which made the original reference to the CJEU. The case was postponed pending the EAT decision in the overtime cases and is re-scheduled to be heard on 4 and 5 February 2015, with the prospect of an appeal to the EAT after that. It is highly likely that the outcome of Lock will be that commission must also be included in the calculation of holiday pay. How that different type of payment will work in the context of the EAT decision is an interesting question. It may be that employers should consider reviewing their commission schemes as the frequency of commission payments could have an impact on the amount of holiday pay they must pay.

Next steps for employers

There is little doubt that the EAT decision that certain overtime payments must be included in the calculation of holiday pay will be confirmed by the CA, but what happens after that. An appeal to the Supreme Court? And then to the CJEU? Wait and see is certainly an option for employers until the dust settles completely.

Those employers who operate a settled pattern of work and who regularly require workers to work overtime may want to take steps now to include this element in the calculation of future holiday pay, and also to look back over the last 3 months’ holidays and pay a supplement if there have been any underpayments of holiday pay in that period. Where there is irregular ad hoc voluntary overtime, arguably such amounts are not required to be included in the calculation. The cautious and administratively simpler approach will be to treat all leave the same, whether it forms part of the first 20 days, the extra 8 days or any additional contractual holiday, but that will have cost implications.

Employers who are faced with the dual threat of overtime and commission payments having to be included within holiday pay may wish to wait until the Lock decision is known, as paying only an overtime supplement now will not break the sequence of unlawful deductions.

Note that payments for bank holidays and for accrued untaken holiday on termination present particular problems, depending on whether the holiday forms part of the first 20 days’ holiday or the additional 8 days’ holiday. A supplementary payment will probably have to be paid by employers for future bank holidays that fall within the first 20 days’ holiday.

Will holiday policies or contracts of employment require amendment? That will depend on the terms of those documents. They should be reviewed.

Some workers (those who follow the traditional holiday sequence of Easter, summer, half-term and Christmas holidays may be the most likely to overcome the 3 month limitation period in the EAT’s decision) may be able to show that their holiday pay underpayments form part of a series of deductions, and can therefore bring historic claims, but these are likely to be limited in number and amount.  They are in any event unlikely to be able to go back more than 12 months in the light of the fact that this holiday pay calculation only applies to the first 20 days’ holiday. Employers are probably best advised to wait until any such claims are made, and then to review carefully the circumstances of each individual claim.

Should employers consider using the power granted to them by the WTR to dictate when holidays are taken, if holidays sought by a worker will result in a windfall? There are attractions to this approach, but also serious worker/employee relations complications.

Employers might also consider reviewing any pension scheme rules to see if the definition of pensionable pay used for the scheme may be affected by this issue.


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