This OnPoint reports on the judgments handed down by the Employment Appeal Tribunal today confirming that under UK law the calculation of holiday pay must include overtime and taxable travelling time payments, that the Working Time Regulations can be interpreted to achieve that result, but that gaps in underpayment of over three months will limit the ability of workers to bring retrospective claims for any shortfall in the holiday pay they have received historically.

“Normal remuneration”

As we reported in a previous OnPoint, the European Court of Justice ("ECJ") has held – in Lock v British Gas – that the correct basis for calculating holiday pay under the Working Time Directive – which the Working Time Regulations 1998 (“WTR”) implements into UK domestic law – in respect of an individual’s statutory holiday entitlement, is not the employee’s basic salary but the individual’s “normal” remuneration – which is in effect the individual’s usual or typical average pay.

Compliance with the Working Time Directive

In today’s judgments, AMEC Group Ltd v Law & Others and Hertel (UK) Limited v Wood & Others and Bear Scotland v Fulton & Baxter, the issue was addressed of whether the calculation of holiday pay in respect of the statutory holiday entitlement provided for by the WTR should include an amount in respect of “non-guaranteed” overtime – that is, overtime which the employer is not contractually obliged to offer but which the worker must work if required to do so.

The ECJ case law provides that during periods of leave under the Working Time Directive workers are entitled to receive any remuneration intrinsically linked to the performance of the tasks they are required to carry out under their contracts and so should be no worse off while on leave – hence normal remuneration for holiday purposes should reflect variable pay such as commission.

In today’s cases the Employment Appeal Tribunal ("EAT") accepted that under established principles it was possible to interpret the domestic WTR to achieve compliance with the requirements of Article 7 of the Working Time Directive such that the domestic rules should be read as providing for normal pay to be paid in respect of the statutory four week element of holiday under the WTR.

Overtime payments

Applying this principle to the cases before the EAT, the workers in question were required to work overtime by their employers and did so regularly – and so their pay for overtime was intrinsically linked to their duties and therefore constituted remuneration which had to be paid in respect of annual leave.

Payments made for time spent travelling

Some of the claimants in these cases received taxable payments for time spent travelling for work – to the extent that these payments were remuneration rather than expenses, these payments were also held to count towards the calculation of holiday pay as remuneration.

Which statutory holidays does this ruling apply to?

In its ruling, the EAT held that the requirement that normal pay include variable pay was limited to the basic four week period provided for under the Working Time Directive and not the additional 1.6 weeks’ annual leave to which workers are entitled under Regulation 13A of the WTR. That said, to treat the two elements of statutory holiday separately could cause considerable administrative complexity.

Time limits for claims

Concern has been expressed very widely that the effect of the ECJ decisions would be to expose employers to very significant liabilities from employees with variable pay entitlements but who only received basic pay while on holiday and that these liabilities could, in respect of the longest serving employees, even go back as far as 1998 when the WTR came into force.

Claims for deduction of wages – and a shortfall in holiday pay counts as a deduction from wages – must normally be brought within three months of the deduction. However, if there has been a “series of deductions” over time, then all the underpayments in the series can be recovered if the claim is brought within three months of the last deduction/underpayment in the series. Workers would argue that to fail to pay proper holiday pay each time an employee took leave would constitute part of the same series of deductions. This would enable a worker to claim for the shortfall in holiday pay for the entirety of his or her post 1998 employment as long as the actual claim brought in the employment tribunal was lodged within three months of the last non-payment.

The EAT has now held that, if there is a gap of more than three months in any alleged series of deductions, the Employment Tribunal loses jurisdiction to hear claims for the earlier deductions. Effectively, this means that claims for arrears of holiday pay based on today’s decisions will in principle be out of time if there has been a break of more than three months between successive underpayments. There may be a sting in the tail to this apparent limitation to the scope of retrospective claims if employees can establish that it was not reasonably practicable to bring their claims in time – we will have to wait to see if the case law develops on that point - or if the taking of Bank Holidays – which can count as statutory WTR leave – bridges what would otherwise be a three month gap in alleged underpayments.

But which holiday is WTR leave and which is additional statutory leave under regulation 13?

Although it did not consider that it had to decide the point, the EAT also held that workers are not entitled retrospectively to designate which holiday was statutory holiday under regulation 13 of the WTR and which was additional domestic leave under regulation 13A so as to create an unbroken “series” of deductions. This could further hamper employees’ attempts to establish a series of deductions in order to lengthen the period for which they can bring retrospective claims. 

Future developments

On a practical level, given the potential payroll cost implications of these rulings, employers need to ensure that their holiday pay arrangements going forward are compliant and will need to address how overtime is recorded and required and how remuneration is to be adjusted to reflect these rulings, as well as how and when any changes to their current arrangements are to be introduced and communicated.

Should claims be brought there may well be all sorts of issues about the time limit points identified above as well as the availability and accuracy of historic holiday records.

In terms of the legal position, not only are today’s judgments being appealed to the Court of Appeal; there are also a number of potentially very important questions which still remain unanswered such as how far back claims can go if there is no three month break in underpayments of holiday pay, whether one off bonus payments will be argued to count as remuneration for holiday pay purposes and whether the 12 week averaging approach used for calculating weekly pay in other employment law contexts provides the appropriate “reference period” for calculating holiday pay – the ECJ in Lock suggested 12 months.

Also, BIS has announced today the establishment of a taskforce to assess the possible impact of these rulings. The taskforce will consist of a selection of government departments and business representative groups and will provide a forum to discuss how the impact on business can be limited. So employers should watch this space as well as taking seriously the issue of reviewing their holiday pay arrangements going forward as well as their potential historic liabilities, even if today’s rulings, if they stand, may limit those contingent liabilities materially.