Holiday pay - key questions answered

On 4 November 2014 the Employment Appeal Tribunal (EAT) handed down its landmark decision in the cases of Bear Scotland Ltd v Fulton and another, Hertel (UK) Ltd v Woods and others and Amec Group Ltd v Law and others.

In each case the employers appealed against Employment Tribunal decisions that overtime worked by the employees should be taken into account when calculating their holiday pay.

In light of the fact that Unite announced on 26 November 2014 that the case will not be appealed, we set out the key questions for employers. 

Must guaranteed and non-guaranteed overtime be included in the holiday pay calculation?

Yes. The cases only concerned non-guaranteed overtime, which is overtime the employee must work if offered it. The EAT decided that it was part of the employee’s “normal pay”, so should be included within holiday pay.

It has always been the case that guaranteed overtime should be included in the calculation of holiday pay as it is normal remuneration.

What about voluntary overtime?

This decision did not specifically deal with voluntary overtime. However it’s likely that voluntary overtime, especially if it is regularly worked, would count as “normal” pay and should therefore be included when calculating holiday pay.

What about other payments?

At the moment case law tells us that holiday pay should also take into account commission, travel time payments (but not travel expenses) and many allowances.

There is no case law as yet on whether bonuses must be included within holiday pay, but a bonus which is regular and paid over a sufficient period of time might be caught.

Should holiday pay be calculated over a 12 week or 12 month period?

This EAT decision did not answer this question. The Court of Justice of the European Union has said it is up to member states to decide what the appropriate reference period should be for calculating holiday pay. The Advocate General in the case of Lock v British Gas has suggested 12 months, but his opinion is not binding. This issue will be considered by an Employment Tribunal in February 2015.

In the meantime, the basic position under the Working Time Regulations 1998 (“WTR”) is that the reference period is 12 weeks. However, it is arguable that if commission or overtime payments fluctuate widely during the year a 12 month period would be better to avoid holiday pay “windfalls”, for example where an employee takes holiday shortly after the payment of half-yearly commission.

There is also a risk that Employment Tribunals may decide on the appropriate reference period on a case by case basis, leading to greater uncertainty.

Does this decision apply to all holiday taken in the UK?

No. In the UK there are two types of annual statutory holiday:

  • 4 weeks (20 days for employees working 5 days a week) provided by European law; plus
  • 1.6 weeks (8 further days for employees working 5 days a week) provided by the UK’s WTR but not under European law.
     

This decision applies only to the four weeks of “European” holiday and not the 1.6 weeks of “UK” holiday, or any additional contractual holiday an employer may give. In most cases, unless the contract of employment says otherwise, “UK” and any additional holiday need only be paid at the rate of basic pay and any guaranteed overtime.

While this distinction is financially beneficial for employers, it adds a layer of complexity to calculating the correct rate of pay as the calculations depend on whether the employee is taking “European” or “UK” holiday.

How will employers know whether the employee is taking “European” holiday or “UK” holiday?

The EAT Judge heard various suggestions but did not make a decision on this issue. He did, however, confirm that an employer has the power to direct when holiday can be taken. He also said that, in his view, an employee might be deemed to take “European” holiday first followed by “UK” and any additional holiday.

In the absence of any rules in the employment contract or holiday policy, for an employee working five days a week that would mean the first 20 days of holiday taken in any holiday year would be the “European” holiday, which has to be paid at the higher rate.

Can an employee bring a claim for underpaid holiday going back to their first day of employment?

Following the Bear Scotland decision, this is likely to depend on each employee’s exact circumstances.

An employee can bring an unlawful deduction from wages claim in respect of a series of underpaid holiday payments. For that reason it had been widely thought that an employee could potentially bring a claim for correct holiday pay for their entire period of employment, with a backstop date in October 1998 when the WTR came into effect.

However, the EAT Judge held that a gap of more than three months between underpayments of holiday will break the series of unlawful deductions. Therefore, if there is a gap between periods of holiday of around three to four months (depending on exactly when the holiday payments were made), the employee would not be able to claim for any underpaid holiday pay for any holiday they took before that period.

The fact that the 1.6 weeks of additional “UK” holiday comes after the 4 weeks of “European” holiday, and does not have be paid at the same enhanced rate, might also break a series of deductions. Holiday pay for the 1.6 weeks will have been paid correctly, which means a worker would have three months from the date of last underpayment of “European” holiday in which to bring a claim. For many workers that opportunity may have passed.

This is a critical new point of law and at the moment this decision will be binding on Employment Tribunals. In many cases this is likely to mean that historic liabilities for unpaid holiday pay will be more limited than was first anticipated. However, in future cases another EAT may find differently or the point may be appealed to the Court of Appeal.

So far claims for unpaid holiday pay have been by way of a claim for unlawful deductions of wages and some have suggested that it would not be possible to pursue this as a breach of contract claim in the civil courts. This may be challenged in the future and, if it is possible to bring claims for unpaid holiday by way of a breach of contract claim, employees would be able to claim unpaid holiday pay going back six years, regardless as to what gap there was between holiday payments.

What are the options?

We recommend employers first carry out an audit of their holiday payments and what they normally pay employees and workers. Only then can employers fully understand the extent of any historic and future liability they face.

Employers should consider instructing their lawyers for assistance with the audit as that might mean any report is legally privileged and would not be disclosable in tribunal proceedings.

Having done that, possible options are:

1. Do nothing

Although we understand that this EAT decision will not be appealed, there are other decisions relating to holiday pay on the horizon, so some employers might prefer to do nothing for the time being.

For the time being, Tribunals will be bound by the decision that non-guaranteed overtime must be included and it is likely that they will find that voluntary overtime and many allowances will also need to be included.

Doing nothing therefore brings with it the risk of poor employee relations, grievances and potentially Tribunal claims.

2. Make a one off correct holiday payment

A single correct holiday payment may be sufficient to break a series of deductions and might therefore limit historic liability.

However, employees and trade unions are likely to see this as a cynical move by employers. Furthermore, it is still not entirely clear how that one correct payment should be calculated, so it could be difficult to achieve in practice.

3. Pay all future holiday correctly

This is better than the previous option for employee relations and might avoid future liability and limit historic liability. However, as with the previous option, how correct payments should be calculated is not clear so it is possible an employer might over or under pay. It is also likely to bring previous underpayments to the attention of employees.

4. Settle any known liability and pay all future holiday correctly

This will be beneficial for employees going forward and settlement might cost less than the full historic liability. However, it might be difficult in practice if there are a lot of employees, some of whom might not have claimed for historic holiday pay anyway.

5. Reduce commission, overtime, allowances and bonus and increase the basic rate of pay instead

This should make it easier to calculate holiday pay correctly in the future. However, it is likely to be unattractive from an employee relations perspective and it will likely trigger collective consultation obligations if 20 or more employees will be affected.

 

Watch our video: S&B Quick Employment Law Guide To… Holiday Pay

For further information please contact Lloyd Davey or Kerry Garcia, or your usual contact at Stevens & Bolton LLP.

Lloyd Davey, Senior Associate
Tel: +44 (0)1483 734232
Email: lloyd.davey@stevens-bolton.com

Kerry Garcia, Partner
Tel: +44 (0) 1483 734270
Email: kerry.garcia@stevens-bolton.com

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Lloyd Davey, Kerry Garcia

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