The Employment Appeal Trubunal (EAT) has ruled that overtime pay must be included in holiday pay calculations.
The decision relates to three conjoined cases:
- Bear Scotland v Fulton and Baxter.
- Hertel (UK) v Wood and others.
- Amec Group v Law and others.
Bear Scotland v Fulton focused on whether overtime pay or shift allowances should be included in holiday pay calculations.
Meanwhiile, Hertel (UK) v Wood and others and Amec Group v Law and others appealed an Employment Tribunal decision in February which found in favour of the workers and recent decisions by the European Court that workers should receive normal pay when on holiday.
The EAT has now ruled that claims for backdated holiday pay are likely to be limited to the previous leave year, rather than to 1998 as was previously expected. In many cases, claims will limited to backdated holiday pay for the previous three months.
Andrew Stones, partner at Squire Patton Boggs, who led the case, said: “The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern among employers of the potential impact of historic holiday pay claims.
”Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims.
”This finding will significantly limit the scope for such claims in the future and the flowing potential liability for [employers].
“In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay.”
Paul Callaghan, head of employment law at international law firm Taylor Wessing, added: “This is a hugely important decision; as of now the law has changed, and [employers] will have to include overtime payment when calculating holiday pay.
”This will be a huge concern for employers, particularly smaller businesses, and they will be particularly concerned to see how far back employees will be able to claim.”
Howard Beckett, executive director for legal, membership and affiliated services at union Unite said: “Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order.
“Employers will now have to include overtime in calculating holiday pay, and those that don’t should be under no illusion that Unite will fight to ensure that our members receive their full entitlement.”
The EAT’s key conclusions:
1. Article 7 of the Working Time Directive requires workers to be paid ‘normal remuneration’ during the holiday to which they are entitled under EU law, i.e., broadly speaking, their typical average pay, not only the basic hours’ pay which has long been understood to be the entitlement of workers with normal hours of work under the UK’s Working Time Regulations (WTR).
2. It is possible to ‘read down’ the domestic Working Time Regulations under the Marleasing principle to achieve compliance with the requirements of Article 7 — potentially giving a very large number of UK workers who have been paid holiday pay representing only their basic hours’ work claims for unlawful deductions from wages. On this, and the Article 7 issue, the employers’ appeals failed.
3. However, the employers’ appeals succeeded on a key issue of limitation: the meaning of a series of deductions from wages. 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. Further, workers are not entitled retrospectively to designate which holiday was “EU” holiday under regulation 13 of the WTR and which was additional domestic leave under regulation 13A so as to create an unbroken series. The EAT’s conclusions may thus severely restrict the ability of workers to bring valuable, retrospective claims for underpaid holiday pay.
Source: Blackstone Chambers
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I understand that this decision also applies to the 4 weeks holiday requirement under EU law rather than the 5.6 weeks required under UK law.
I understand that this ruling will prevent the poor practice of giving an employee a contract for a few hours a week and then ‘requiring’ them to work longer hours on a regular basis. However, for the majority of employers who offer small amounts of overtime it will mean that less overtime if offered because of the cost and bureaucratic nightmare of recalculating holiday every month.
This employment tribunal ruling has a significant impact on employers across the UK. They will need to review the basis on which they calculate holiday pay to include elements that have previously been disregarded – not just overtime, but also allowances, shift premiums and the like.
The cost implications for those with large workforces and who regularly depend on overtime are significant. Businesses that are traditionally busy at Christmas time and who depend on overtime need to review their practises now.
Some employers are saying that the impact on the wage bill could put their businesses at risk; others are looking now at how they can cut costs or change working practises to meet the additional liability.
Holiday pay has traditionally been calculated by reference to ‘basic pay’. However, today’s decision confirms that overtime and certain other payments over the previous 12 weeks must now be included in holiday pay.
There are wide-ranging impacts on UK businesses. Moving forwards, employers will need to carefully examine all components of employees’ pay, including overtime payments, to check whether they should be included in holiday pay calculations. Employers will need to ensure that all guaranteed, as well as certain non-guaranteed, overtime is included as a result of today’s ruling.
It is likely that employers will now face an influx of claims from employees for historic holiday payments, where employees’ calculations of holiday pay only included basic pay and not overtime. It was initially feared that such claims could go back as far as 1998, when Working Time Regulations were implemented. However, following a successful appeal, such claims can only be made in respect of an ongoing loss, making it difficult to link together different holiday pay periods as one ongoing series of deductions. This is an important victory for employers, as it significantly reduces the possibility of employees successfully claiming backdated holiday over a number of years. Of course, an employee who can demonstrate they have taken a single day’s holiday every month for the last 3 years, for example, could make a claim in respect of the whole period on the basis that it represents a chain of linked events.
It should be noted that the ruling only applies to the statutory element of the holiday entitlement and so any additional holiday entitlement provided by the employer is not subject to the ruling.
The news that the UK’s Working Time Regulations require holiday pay to include amounts for overtime will come as a blow to British businesses still struggling with the financial recovery.
One sixth of British workers are estimated to receive overtime pay so the cost and administrative burden for overtime-reliant businesses will be massive. Many will cut back on overtime and reconfigure their working patterns to mitigate the consequences of this decision.
However there is a crumb of good news regarding the spectre of historic liabilities for holiday pay which has been causing huge concern for employers. Although the exposure to back pay claims exists, any period where an employee did not take holiday for three months or more will break the chain and curtail the period for which past holiday pay can be claimed. Businesses will be scrutinising their holiday records to calculate the extent of their exposure. This analysis is likely to become an important and time-consuming area for diligence in corporate transactions, which may well hinder what is already a fragile M&A market.
Other cases still in the system may extend this to commission and other payments too. This decision will probably be appealed but these new rules originate from EU decisions and so this direction of travel seems inevitable. No doubt, this will add fuel to the fire in the debate of Britain’s ongoing EU membership.
Today’s decision will lead to higher wage costs for many employers. But the anticipated retrospective claims going back numbers of years may very well be more limited.
The tension in these cases is between EU and UK law and the extent to which the UK Regulations accurately interpret the EU Working Time Directive. The European courts have consistently emphasised the need for normal remuneration to be maintained during periods of annual leave. So today’s decision is not a surprise. The matter is further complicated by the EU rules providing for 4 weeks’ leave whereas domestic UK rules provide for a statutory minimum of 5.6 weeks. The decision applies to the 4 weeks’ leave granted under EU rules only
The EAT addressed 3 core issues around variable pay components and holiday pay. It found that non guaranteed overtime is part of normal remuneration and must be included in holiday pay, as must any other fluctuating payments such as shift allowances and comparable payments where they are intrinsic to work. It was found that existing UK law could be interpreted in order to give effect to that EU requirement.
The interesting part of the judgment is that claims must be brought within 3 months of the last pay deduction. The series of deductions can be broken down when there is greater than a 3 month period between deductions. Some comfort can be given to employers. Employees cannot designate leave as “EU” or “Domestic” leave to enable them to create an unbroken series. This may significantly restrict workers bringing valuable retrospective claims.
Future appeals are anticipated, particularly on the time period of claims and breaking the series of deductions.”
The hidden holiday pay story continues and this decision in favour of employees is by no means the end of it. Employers who have not already received significant demands for payment or substantial legal claims should quickly brace themselves to do so. However, there is some good news in the decision for employers about the time limit for making claims.
As the run-up to the next General Election gathers pace, we can also expect all the major political parties to face demands from UK employers to find an affordable solution, and fast.
The EAT ruling, while not unexpected in light of the ECJ cases, is nonetheless a headache for employers going forward given the increased holiday pay liability for businesses with an overtime based workforce.
However, employers will be breathing a huge sigh of relief because the risk of claims for underpaid holiday going back to 1998 seems to have receded as a result of the decision. Although employees who work non-guaranteed overtime will be entitled to greater holiday pay in future, the real concern for business was uncertainty about how to quantify the potential exposure for back claims. The EAT’s decision will make it much more difficult for back claims of this sort to be brought.
Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.
Employers and workers can also contact the ACAS helpline for free and confidential advice.
This ruling is going to have a profound impact on all UK businesses, costing them billions of pounds and potentially driving some to the wall.
SMEs that regularly pay staff for overtime are likely to be the hardest hit. They could face enormous liabilities on backdated holiday pay claims that could stretch back many years, as they are less likely to have had the right systems in place to help them calculate their liabilities easily or the cash reserves to meet the liability.
It’s almost certain that this result will be appealed.
Businesses are understandably angry that they have behaved in a way that they thought was compliant with the law, only to be told by the courts that they have not. Some of the businesses that are affected are inevitably going to look at taking action against the Government for what they see as the Government’s failure to take on the EU legislation and apply it properly.
Second ruling due soon on commission and bonuses in holiday pay
Many professional employers in areas like financial services will now be profoundly worried about the ruling due on holiday pay and commission – a similar outcome would have major repercussions.
The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern amongst employers of the potential impact of historic holiday pay claims. Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today. Although opinions are mixed and we do not agree with some of the findings, we are pleased with the limits put in place on retroactive claims. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims. This finding will significantly limit the scope for such claims in the future and the flowing potential liability for companies.
While there are likely to be many businesses across the country, both big and small, that are still concerned about how this judgment could impact them, this is a very significant and positive finding for employers worried about retrospective liability. In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay.
Businesses will now need to base holiday pay on an average of actual earnings , rather than on basic salary as currently permitted under UK law. This decision imposes major additional costs on UK businesses and a significant administrative burden.
Today’s decision follows a line of CJEU cases indicating that holiday pay must be at a similar level to normal pay and must include all elements of the worker’s pay which are ‘intrinsically linked’ to their duties, so that workers aren’t discouraged from taking holiday.
The Employment Appeal Tribunal case – Wood v Hertel (UK) Limited – applies to the four weeks of annual leave guaranteed under EU law, and not the additional 1.6 weeks required under UK legislation.
Crucially, however, the EAT found that workers could not backdate their claims back to 1998 as had been feared; instead in many cases claims will be limited to backdated holiday pay for the last 3 months.
John Lewis had to pay out £40 million to staff last year because of the way it had been calculating holiday pay. Other businesses will be relieved not to crippling bills for backdated pay, as well as the administrative headache of trying to calculate what was owed – particularly tricky if the business had changed hands. This issue has been complicating business acquisitions; this case clarifies the law and limits the financial exposure.
The potential financial implications for many employers will be significant. The number of potential claimants across various sectors and industries is vast.
The law on holiday pay has been in a state of flux for sometime. However, we envisage that the EAT’s decision will not be the last word on this issue. As significant sums are involved, we expect the decision to be appealed.
Due to the costs involved many employers may now look to reduce the availability of overtime, where feasible.
Recent European case-law decisions on holiday pay had cast doubt on whether employers are correctly paying their staff for holidays. At present, many UK employers pay just basic pay to employees on holiday. Questions have been raised as to whether UK legislation can be properly interpreted to give effect to the European position.
Today the EAT decided that workers are entitled to be paid a sum of money to reflect normal non-guaranteed overtime as part of their annual leave payments and that travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay. This applies to the basic four week leave granted under the Working Time Directive.
However, importantly for employers the tribunal will not have jurisdiction to hear a claim for arrears of holiday pay if there has been a break of more than three months between successive underpayments. Nevertheless, the financial implications for employers are potentially huge and following the ruling the government has immediately announced the setting up of a task force to assess its impact.
The EAT has granted permission to appeal all of the points decided and it can be expected that the decision will be appealed. However, it is likely to take some time before the Court of Appeal will decide and in the meantime, due to the costs involved, employers may now look to reduce the availability of overtime where possible.
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