EAT Judgment on Calculating Holiday Pay.
Under the Working Time Directive workers are entitled to a minimum of 4 weeks’ annual leave each year. In the UK, the Working Time Regulations (WTR) provide a domestic right for workers to receive an additional 1.6 weeks’ annual leave. Thus giving workers 5.6 weeks (28 days for those who work five days a week) annual leave each year.
For most workers holiday pay is calculated by the rate of one week’s pay for each week of leave. There has historically always been difficultly however when calculating holiday pay for workers who receive overtime payments.
Decision of the EAT
On 4th November 2014 the Employment Appeal Tribunal (EAT) handed down judgment in the Bear Scotland v Fulton case which deals with the calculation of holiday pay for workers with non-guaranteed overtime (overtime which a worker is required to work but which an employer is not required to offer). In doing so the EAT has confirmed that the calculation of holiday pay must include normal non-guaranteed overtime. The ruling makes clear that it is incorrect for employers to only take into account basic pay when determining a worker’s holiday pay. As aresult of the EAT’s judgment employers need to be aware of the additional three keys points:
- Claims may only be made by a worker if it is less than three months since the worker’s last holiday. Thus, a claim will be out of time if there has been a break of more than three months between successive underpayments.
- The obligation to include overtime payments in holiday pay only applies to the basic 4 weeks’ leave as prescribed under the Working Time Directive. The additional 1.6 weeks’ leave, which workers are entitled to under the WTR need only take into account compulsory, guaranteed overtime (i.e. not voluntary)
- Where payments are made to workers for their time spent travelling to work, these payments should also be included in the holiday pay calculation.
Despite worries that workers would be able to make backdated claims for historic holiday pay, over a number of years, the EAT limited the extent to which they can make retrospective claims for underpaid holiday. It did this by providing that workers cannot treat each under payment of holiday pay as a series of deductions beyond 3 months and claim under payments as part of an unlawful deduction from wages claim. Employers should therefore take some comfort in the fact that for the time being they will not receive large bills for historical holiday pay claims but nonetheless employers will (at some stage) need to review and probably amend their method of calculating holiday pay to reflect the EAT’s judgment, subject to the outcome of the anticipated appeal process. The ruling is likely to be referred to the Court of Appeal as the EAT did give the parties leave to appeal this point on the grounds it was “arguable as well as of public importance” and so there is every chance this judgment may be amended or reversed.
Workers will inevitably be aware of the decision due to the wide press attention it has received and will attempt to recover backdated holiday pay they believe they are owed. The cost of this has been estimated by the EEF to be between 3% to 5% in payroll costs and IOD have referred to it as a “ticking time bomb”. The first point to bear in mind is that the decision will more than likely be the subject of a further appeal. In fact there is a strong likelihood it will run to the European Court of Justice which would mean months even years of further litigation. As a result of this, most employers will probably want to await the final outcome before changing the way they calculate holiday pay. Secondly, for the time being at least, because of the limits on how far back workers can claim under payments of holiday pay, the exposure to claims isn’t quite as catastrophic as reports in the press would have you believe. Those who wish to adopt a cautious approach may want to calculate the potential cost to them now and decide if they can afford to make the changes now or make accruals in the event of possible claims in the future. If you choose to do this however you should include commission payments given the Advocate General’s decision in Lock-V-British Gas. (See our article on the case here) Another option to consider is using agency staff to cover periods where overtime is needed rather than offer existing members of staff overtime. This may reduce the amount of holiday pay to be paid to staff thus alleviating the financial burden this judgment presents. Of course, it may not actually be cost effective for every employer to adopt this approach but it is worth considering. Finally, at the moment the decision applies to overtime an employee is entitled to be paid for even if they don’t work it (guaranteed overtime) and overtime which an employee is not obliged to offer but which a worker is obliged to perform if requested (non-guaranteed overtime). It potentially does not however apply to overtime which an employer is not obliged to offer, but if it does a worker is not required to perform it (voluntary overtime). The EAT didn’t reach any conclusive decision on relation to voluntary overtime, which leaves the door open to employers re-arranging overtime arrangements so that the ability to do overtime is voluntary. In response to the decision, Vince Cable immediately announced the Govt’s decision to setup a “taskforce” aimed at looking how the impact of EAT’s judgment can be addressed. Interestingly, the taskforce consists of employer organisations such as CBI, EEF and IoD along with Govt. Depts but significantly, no employee representatives in the form of unions for instance.