Holiday pay gets interesting

By Mike Emmott, CIPD Employee Relations Adviser, @emmott_m

 

Now we have the much awaited judgment by the Employment Appeal Tribunal (EAT) in the case of Bear Scotland on holiday pay, where does it leave employers?

 

One thing is absolutely clear: employers will have to change how they calculate holiday pay in future to take account of regular overtime, as well as other elements of “normal remuneration”.  But this much has been on the cards since the judgements by the European Court of Justice (ECJ) in Williams v British Airways and Lock v. British Gas in the last couple of years.  

 

What that will cost employers remains a matter for lively debate.  That is one of the key issues facing the employer task force set up by the Department for Business, Innovation and Skills to look at the implications of the EAT judgement. The Engineering Employers Federation, which represents mainly employers in manufacturing, say that two-thirds of their members estimate the change will add more than 3% to their current payroll, but that figure cannot of course be taken to apply to the economy as a whole. The longer term impact will also depend on how far economists are right in assuming that increases in holiday pay will be substantially offset by reductions in ordinary pay. 

 

What the EAT has done that breaks new ground - and has come as a welcome surprise to employers - is to severely limit the scope for retrospective claims, possibly going back many years.  Claims to an employment tribunal for unlawful deduction from wages must normally be brought within three months of the date when the deduction was made.  If the complaint refers to a series of deductions, the three months’ time limit applies to the most recent deduction.  Mr Justice Langstaff concluded in Bear Scotland that a break of more than three months at any stage in the chain will destroy the series. 

 

Moreover the EAT ruling applies only to the four weeks annual holiday pay entitlement derived from the Working Time Directive.   So remaining days of holiday, including the eight additional days required by the Working Time Regulations, and any contractual leave, can still be paid at the basic hourly rate.  And such “non-EU” holidays will make it more difficult for employees to show that there has been no more than three months between unlawful deductions.  So employees who have been led to believe that there is gold at the end of this rainbow would be advised, at least at this stage, not to count their chickens. 

 

There appears to be some uncertainty about how far voluntary overtime needs to be taken into account for holiday pay.   The judge in Bear Scotland said that his decision applied to overtime that was not guaranteed but the employer could insist that the worker perform.  In this case, it would appear on the face of it that voluntary overtime - that is overtime which the worker can choose whether to work or not – need not be reflected in holiday pay.  But employers need to be cautious about jumping to this conclusion.     

 

The reference by the EAT to "non-guaranteed" overtime springs from the particular facts of the case, which required the court to consider the National Agreement for the Engineering Construction Industry (NAECI).  It is overtime that can be required by the employer, but the employee cannot count on being offered.  It may be that "voluntary" is not the best term to be applied to describe it: indeed the judge specifically said he thought the word was misleading.  But that is not to say that voluntary overtime need not be taken into account in calculating holiday pay. 

 

In order to clarify what the EAT is saying, we need to go back to the ECJ ruling in Lock.  In paragraph 25 of the EAT judgement, Mr Justice Langstaff refers to that ruling as requiring that remuneration in respect of annual leave must in principle be determined in such a way as to correspond to the worker’s “normal remuneration”.  If employees are regularly working overtime, whether required by their employer or on a voluntary basis, it’s hard to resist the conclusion that pay for that overtime is part of their normal remuneration and so needs to be taken into account when calculating holiday pay. 

 

The word “regular” may also be slightly misleading.   How regular does overtime have to be before it should be considered to be part of normal remuneration?  I suggest that most overtime could be regarded as “regular” unless it is wholly exceptional.  Much will depend on the facts of individual cases, but employers who seek to draw fine distinctions in this area may be adding unnecessary complication to their calculations and undermining relations with their workforce. 

 

There is a related issue that remains to be determined and that is the length of time over which overtime should be measured in order to calculate an average for the purpose of holiday pay.  If the period is too short, it can be subject to “gaming” by either side so as to either increase or reduce the employer’s liability for holiday pay.  So a period of six months might be safer than the three months currently set out in the Employment Rights Act 1996. 

 

However even a period of six months would not necessarily get over the incidence of seasonal work – for example in retail over Christmas – depending when the period is selected to begin.  The judge in Bear Scotland suggested that employers may have some discretion in determining the reference period, so long as it is “reasonable”.  However leaving it to the individual employer to decide would risk a succession of challenges in employment tribunals and the best course might be to set a default period of one year. 

 

The Bear Scotland judgement may be appealed, in which case the obvious issue is whether what Darren Newman has called "elegant" reasoning by the EAT on what counts as a series of deductions (see above) will be upheld on appeal.  The amounts of money likely to be at risk by way of retrospective holiday pay, at least for some employers, are very large.   But the UK government and employers have been acting in good faith in implementing the terms of the Working Time Directive in relation to the calculation of holiday pay, despite the fact that their interpretation turns out to have been wrong.  It would seem to be a bold step by a higher court to overturn the EAT judgement on this particular issue, with the negative impact on jobs that would inevitably follow. 

 

 

 

 

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  • Anonymous
    Anonymous

    Can an ex-employee claim for this holiday difference. And what is the timescale from leaving to claiming.

    Many thanks

    Jane

  • Anonymous
    Anonymous

    Can an ex-employee claim for this holiday difference. And what is the timescale from leaving to claiming.

    Many thanks

    Jane


  • Many thanks for posting this , Mike.

    Jane - there's a good discussion thread on this topic in the CIPD online community.

    www.cipd.co.uk/.../discussion.aspx


  • This gets more and more interesting !