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Holiday pay update- Lock, Stock and Two Smoking Barrels?

On Wednesday of last week, we had the latest development in the ongoing saga of what pay an employee is entitled to when they take annual leave.  This instalment came as a result of the Employment Tribunal in the case of Lock v British Gas Trading Limited reconvening following on from an earlier decision taken by the Court of Justice of the European Union (CJEU) in the same case.

Lock…

Mr Lock worked in sales and his case related to his claim that when he took a period of annual leave he was unable to earn commission which he otherwise could have done in carrying out his duties.  Accordingly, when taking annual leave, he suffered a subsequent reduction in pay.  Interestingly, the case did not relate to the actual pay which Mr Lock received during his holiday periods: British Gas did account for commission earned in previous periods when calculating the payment due for annual leave.  Rather, Mr Lock argued that as he was unable to earn commission during annual leave, the pay he would receive in subsequent periods was reduced.

In its decision, the CJEU indicated that Mr Lock’s claim was a valid one and that commission (both in respect of periods of annual leave and in respect of any subsequent pay which would otherwise be reduced as a result of taking annual leave) required to be taken account of in calculating pay due to Mr Lock. Given that the CJEU had already taken this decision, the only matter for the employment tribunal to address when it reconvened was whether or not the Working Time Regulations 1998 (WTR) could be read to give effect to the EU directive on annual leave.  The tribunal found that this could indeed be done and, as such, Mr Lock had a valid claim under UK law.

Whilst, in broad terms the Employment Tribunal’s decision did not come as a surprise, it does provide an opportunity for us to review exactly how case law has developed in respect of employees rights to holiday pay.

Taking stock…

As some legal commentators have noted, there is a growing tide in favour of tribunals and courts providing workers with all elements of pay which are intrinsically linked to the work which they do when calculating holiday pay.  This basic principle arose in the claim of Williams v British Airways. This case was decided under the Civil Aviation Working Time Regulations. While these regulations are different to the WTR, the wording used within them mirrors that used in the WTR, so there was a degree of inevitability that the reasoning of the CJEU in the Williams case was going to be adopted for the purposes of the WTR at some point in time.  As indicated above, Williams gives us the authority that “normal remuneration” will include pay which is intrinsically  linked to the performance of a job or tasks which are carried out in respect of the same.  Any such pay allowances need to be accounted for when calculating holiday pay.

Following on from this, we then had the decisions in the cases of Robinson-Steele v RD Retail Services Limited, which confirmed it was unlawful for employers to pay “rolled up” holiday pay as an alternative to workers actually taking annual leave and the well publicised case of Stringer v Revenue and Customs Commissioners which confirmed that workers on long term sick leave continued to accrue holidays under the WTR. These two cases made it clear that, so far as European law was concerned, annual leave was an extremely important right allowing workers the benefit of a period of relaxation and leisure.  Any national law which sought to dissuade employees from taking annual leave and therefore miss out on those benefits would strike against the entitlements which the EU directive on annual leave provided and, as such, be unlawful.

Whilst the Robinson-Steele and Stringer cases could be said to more directly relate to the employees accrual of and opportunity to actually take annual leave, it is a similar reasoning at play in respect of the more recent cases which deal with the calculation of holiday pay itself.  The CJEU have ruled that employees should not be dissuaded from taking annual leave by the fact that, in doing so, their remuneration would be detrimentally affected.

Two Smoking Barrels?

In the recent case of BEAR Scotland Limited v Fulton and others (and related claims) (“BEAR”), the Employment Appeal Tribunal (“EAT”) ruled that non guaranteed overtime worked by an employee had to be taken account of when calculating the holiday pay due to that employee when taking a subsequent period of annual leave.  As indicated above, the Lock case now confirms that commission also requires to be taken account of by employers when calculating holiday pay.

Accordingly, there is a clear movement from the CJEU and the UK tribunals towards implementing the basic position which was initially set forth in the Williams case.  For employers this means that any pay elements which a worker would ordinarily receive for the carrying out of work will need to be accounted for when calculating holiday pay.  The very fact that the Lock decision goes further than requiring an employer to take account of such pay elements for holiday pay itself (requiring an enhanced payment to be made for subsequent pay which would otherwise have been affected by the taking of annual leave) is further evidence of the way in which these issues are going to be dealt with in the future.

Whilst we only have reported decisions dealing with two elements of pay (non-guaranteed overtime and commission), it seems as though employers will need to accept that their obligation to account for holiday pay will go beyond these two allowances.

For example, we have received many queries asking how these cases will impact upon voluntary overtime, being overtime which an employer has no obligation to offer and, where it is, the worker has no obligation to accept.  Our view is that this is also something which will need to be accounted for when calculating holiday pay (where additional pay would be due to the worker).  Whilst there is no authority or case law which directly confirms the point, the way in which previous cases have been decided clearly points to voluntary overtime falling within the wide ambit of the term “normal remuneration”. There is currently litigation underway in Northern Ireland where it is hoped that the matter will be clarified once and for all.

Indeed overtime rates, enhanced allowances and specific allowances (e.g. anti-social hours payments) are all also likely to be viewed as “normal remuneration”.

Reference periods

The one point which the present case law has yet to provide a determinative answer on is that of what reference period should be used when calculating holiday pay.  The statutory position (as is set out in the Employment Rights Act) points towards a reference period of the 12 week’s worked immediately before the date upon which annual leave is taken.  However, BEAR indicated that such a 12 week reference period may not always be appropriate and the statutory position may be departed from where circumstances dictate it should be.

A silver lining?

Whilst the decisions that have been issued do appear to be negative for employers, they are perhaps not as devastating as the picture initially seemed.  There are a number of reasons for this:

All of the decisions which have been taken so far relate exclusively to the holidays provided for under European law only.  The EU directive on working time only provides for workers to receive four week’s annual leave.  Accordingly, the additional 1.6 weeks of annual  leave provided for under Regulation 13A of the WTR will fall outside the scope of these decisions.  That means that those 1.6 weeks of holiday could still be paid with regard to basic pay alone.  Similarly, any additional enhanced contractual  leave which an employer may offer could also be paid in accordance with basic pay only.  However, employers would need to ensure that the wording used in contracts of employment make it clear as to the basis upon which enhanced contractual leave will be paid.

The fact that the decided cases only apply to the initial four weeks of holiday due to a worker is material when considering a worker’s ability to pursue a claim for backdated holiday pay.  Any claim for historic underpayment of annual leave needs to be brought within 3 months of the date upon which the underpayment of salary was made.  If there has been a series of deductions in respect of holiday pay, the claim must be brought within 3 months of the last date in the series of those underpayments.   In BEAR, the EAT confirmed that if there is a of break three months or more in any series of underpayments, the underpaid holiday pay which falls before that 3 month break can also not be claimed and any claim to recover this will be time barred.  The fact that only the first four weeks of annual leave which a worker is due requires to take account of all “normal remuneration” means that there is a much greater likelihood of backdated holiday pay claims being time barred than would be the case if all holiday entitlement to which a worker is entitled was covered by these decisions.  For example:

  1. If an employer has a holiday year of January to December;
  2. If the employee works 5 days per week and has a contractual entitlement to 7 week’s annual leave (i.e. 35 days);
  3. If the employee takes their 20th day of annul leave (i.e. completing their 4 weeks of European leave)   in July and that holiday pay is paid in the employer’s July payroll (e.g. 31 July);

Then this means that any unlawful deduction of wage claim in respect of holiday pay must be pursued by 30th October.  If not, then that claim would be time barred.  This would be the case even if the worker had taken further leave under Regulation 13A of the WTR or under their contract, as it is still lawful to pay those holidays by reference to basic pay only, meaning there would be no unlawful deduction.

Focusing this in on backdated holiday pay claims, it creates a strong  likelihood of their being 3 month gaps between the dates upon which workers take European leave. Returning to our example, if a worker’s next period of European leave falls in January of the subsequent leave year, this will leave a 7 month gap between deductions in pay (i.e. the gap between the July payroll and the following January’s payroll). As such, where workers exhaust their European leave by September, it is probable that any claim for backdated holiday pay will be restricted to the holiday year in which the claim is raised. This should mean that employers potential liabilities are greatly reduced when it comes to  backdated holiday pay claims.

Finally, on 1st July 2015 the Deduction From Wages (Limitation) Regulations 2014 will come into effect.  This will place a statutory limit on the period over which a worker can bring a backdated unlawful deduction of wages claim.  Workers will not be able to seek compensation for any unlawful deduction of wage for greater than a period of 2 years, going back from the date upon which the claim is lodged. Importantly, this limitation will only apply to claims lodged on or after 1st July 2015, so if a worker has a live claim which has been raised before that date, then they will still be able to argue for backdated holiday pay claims going back for a further period.  However, in doing that, the time bar issue raised above could still be an issue to be overcome.

Summary

It could be said that we are now moving towards the end game in respect of the holiday pay litigation.  Whilst there are still questions to be addressed in respect of quantification of any claims, employers obligations are certainly a lot clearer than they were 18 months ago.  In short, any payments which a worker receives which are intrinsically linked to the carrying out of work should be accounted for by employers when calculating holiday pay.  If employers have not already addressed their holiday pay practices, now is the time to do so.  If steps are taken to ensure that all “normal remuneration” is accounted for now, then this should place a bar on workers being able to pursue potentially significant backdated holiday pay claims and limit potential liabilities moving forward.

The issue is complicated and if you require detailed advice in respect of dealing with holiday pay claims, please contact our employment law team for detailed advice.