The Clarity Blog

Holiday Pay Ruling – what will it mean for you?

The Employment Appeal Tribunal (EAT) has today handed down judgment 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).

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 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. 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:

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.

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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