Employment Focus August 2016. We’re all going on a summer holiday

The summer holidays are upon us, but where do employers currently stand when it comes to holiday pay?

We had the case of Bear Scotland Ltd v Fulton and another in November 2014, but what has changed since then?

Although there is, no doubt, uncertainty following the UK’s decision to leave the European Union, and we don’t know what the ultimate impact of this will have on our employment laws, for the time being and certainly for the immediate future, things remain the same. This is particularly so concerning payment for paid holidays.

Legal Background   

The European Working Time Directive 2003 (WTD) provides that EU member states must ensure that workers have the right to a minimum of 4 weeks’ paid holiday. The problem is that the WTD doesn’t specify how the pay for this should be calculated. This is left for domestic legislation to decide.

The UK has implemented the WTD through the Working Time Regulations 1998 (WTR) which, whilst covering this right, also provide for an extra 1.6 weeks’ paid holiday entitlement, meaning the statutory minimum annual paid holiday entitlement for workers in the UK is currently 5.6 weeks.

Under the WTR workers are entitled to be paid at a rate of a ‘week’s pay’ for a week’s holiday, calculated in accordance with the domestic UK legislation in the Employment Rights Act 1996 (ERA). The ERA distinguishes between employees with ‘normal working hours’ and ‘no normal working hours’ and, in light of the provisions of the ERA and historic case law, employers have historically paid basic pay only when their staff are on holiday for employees with normal working hours

Case Law

Most employers will have heard of the Bear Scotland case in the news towards the end of 2014. However, it is important to be aware of the other cases that have preceded and followed this.

In 2011, in the case of Williams v British Airways plc, the European Court of Justice (ECJ) held that the WTD requires workers (in this case pilots) to be paid “normal remuneration” in respect of the 4 weeks statutory leave entitlement under regulation 13 of WTR. This includes remuneration that is ‘intrinsically linked’ to the performance of the tasks which a worker is contractually obliged to carry out. Although this case concerned the Aviation Directive and not the WTD, the ECJ ruled that same principles apply to both.

Williams was followed by the case of Lock v British Gas Trading Ltd in which the ECJ held that holiday pay under the WTD could not be calculated based on basic salary alone where a worker’s remuneration includes commission determined with reference to sales achieved. This was based on the concern that workers might be deterred from taking holiday if they were going to end up financially worse off e.g. because they hadn’t achieved sales which would earn them commission whilst on holiday.

The decisions in these two cases raised a number of questions about the way in which holiday pay was calculated under the WTR, and whether it was compatible with the WTD. Further cases were brought where workers challenged the way in which their holiday pay had been calculated.

Bear Scotland

The judgement in the case of Bear Scotland specifically related to non-guaranteed overtime and various travel allowances. The EAT held that:

• The WTD requires that workers are paid “normal remuneration” during periods of annual leave. Payment must be made for a sufficient period of time for it to qualify as “normal”.
• There should be an intrinsic or direct link between the payment claimed and the work a worker is required to carry out under their contract. The EAT said that where overtime is required, it would be perverse to hold that the resulting overtime pay was not intrinsically or directly linked to the work. Therefore non-guaranteed overtime (where an employer is not obliged to provide overtime but an employee is obliged to work if requested) should be paid during annual leave.

The “normal remuneration” approach described above therefore meant that limiting holiday pay to base pay alone was no longer appropriate but only in connection with the holiday granted under the WTD – 20 days per annum.

Further developments

In March last year, following the ECJ’s finding as mentioned above, an employment tribunal heard the case of Lock.

The tribunal held that the WTR should be interpreted so as to include commission payments in holiday calculations in respect of the WTD statutory leave (20 days).

The tribunal applied the Bear Scotland case, finding that there was no difference between commission and pay for non-guaranteed overtime, which meant commission must reflected in holiday pay.

British Gas appealed against this decision, arguing that Bear Scotland was wrongly decided and that the words inserted into the WTR amounted to “judicial vandalism”, and that commission and non-guaranteed overtime are dealt with under different provisions of the WTR which uses different language. The EAT rejected these arguments and dismissed the appeal in February this year. British Gas appealed this decision, and their appeal was heard by the Court of Appeal on 11 July. Judgement was reserved so we will need to watch this space.

In June 2015, the Northern Ireland Court of Appeal heard the case of Patterson v Castlereagh Borough Council which covered voluntary overtime. The court held that there is in principle no reason why voluntary overtime should not be included in the calculation of holiday pay. It will be interesting to see if and how this decision is relied upon to argue the point in the employment tribunals in England and Wales.

We have also recently had the Brexit vote and once we are out of Europe it could well be the case that the government legislates to bring us back to holiday being calculated on base pay alone. We will have to see!

So, what does this all mean for employers?

As things currently stand, holiday pay should be based on a worker’s ‘normal remuneration’ and at the moment it looks like the following payments should be included in this calculation:

• non-guaranteed compulsory overtime;
• commission;
• standby payments;
• emergency call out payments;
• “acting up” supplements;
• radius allowances; and
• travelling time payments.

If the correct elements aren’t included in holiday pay, workers can bring unlawful deduction of wages claims. Such claims have to be brought within 3 months of the date when the specific payment in question fell due.

The Bear Scotland case also confirmed that, where there has been a series of deductions, and a claim is being brought within 3 months of the final deduction, there cannot have been a gap of more than 3 months between any of the individual deductions. Theoretically this meant that if someone hasn’t been paid the correct holiday pay since the WTR came into force in 1998, and they hadn’t had a gap of more than 3 months between each holiday, an unlawful deduction in wages claim could have gone back as far as 1998. However, given the serious implications this could have had on UK employers, additional legislation came into effect in July last year which imposed a cap of two years on retrospective unlawful deduction of wages claims. This applies to claims brought on or after 1 July 2015. The legislation also confirmed that the WTR do not give workers a contractual right to paid leave, therefore seeking to prevent workers trying to bring breach of contract claims (where the limitation period is 6 years) to get around this.

If you would like any further advice on this topic please contact Catherine McNulty, Associate in the Employment Team, at catherine.mcnulty@sintons.co.uk or 0191 226 3801.