Important Ruling on Calculating Holiday Pay

Important Ruling on Calculating Holiday Pay

This week the Employment Appeals Tribunal (EAT) in England delivered a landmark Decision in the co-joined appeals Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others and Amec Group Limited v Law and others. The EAT ruled that “non-guaranteed” overtime should be included when calculating statutory holiday pay but limited the extent to which workers can make claims for historical underpaid holiday. This article summaries the law and considers the impact of this Decision on our Members.

Background

In Northern Ireland all workers are entitled to 5.6 weeks holiday under the Working Time Regulations (NI) 1998, as amended (WTR.) This is made up of 4 weeks (or 20 days) holiday derived from the European Working Time Directive (WTD) and a further 1.6 weeks (or 8 days) holiday enhanced by national law.

Workers are entitled to be paid at a rate of a week’s pay for each week of leave. When assessing a “week’s pay” the Employment Rights Order (NI) 1996 distinguishes between:

  • “Employments with normal working hours” (Article 17): where employees are entitled to receive holiday pay for basic hours normally worked; and
  • “Employments with no normal working hours” (Article 20): where pay will be calculated by reference to pay received in the 12 week period prior to the holiday.

Importantly, prior to this week’s Decision of the EAT, the case law to date had stated that non-guaranteed/non-compulsory overtime was not included in the calculation of a week’s pay.

Decisions from the CJEU over the past few years have continued to change the legal landscape regarding holiday entitlement and pay. The CJEU judgments in the cases of Williams v British Airways and Lock v British Gas held that workers are entitled to receive their “normal remuneration” during periods of annual leave. In Williams the Court held that in addition to basic salary, a worker is also entitled to receive any remuneration “intrinsically linked to the performance of the tasks which he is required to carry out under his contract.” In Lock the Court held that normal remuneration also includes commission payments that were determined by reference to sales achieved.

In the Bear Scotland & others Decision the EAT considered what constitutes “normal remuneration” and ruled that it must include non-guaranteed or compulsory overtime which a worker is required to work but an employer is not required to offer. This is considered in further detail below:

Summary of the Decision

In Bear Scotland, the employees’ contracts detailed their normal hours of work. However, their actual working hours varied from week to week as they could be required to work overtime they could not unreasonably refuse. In addition, the employees regularly worked night shifts, for which they were paid a higher rate. They also received standby payments at a flat rate for being on standby and emergency call out payments if they were called out whilst on standby. The employees were paid holiday pay at the basic rate of pay for their contracted hours only. No premium was included for night shift, standby, or overtime.

In the Hertel & Amec cases, the employees’ contracts stated they were employed on a basic working week of 38 hours. Any hours worked in excess of 38 hours were counted as overtime and attracted a higher rate of pay. Employees were obliged to work shifts and overtime as required; in practice the shift patterns meant the working week was around 44 hours. Employees received a fixed individual “productivity” allowance that was paid for all hours, and monthly payments based on team performance. When travelling to site more than 8 miles away, the employees received both a radius allowance for travelling time and fares, and a travelling time payment.

The employees were paid holiday pay according to the basic 38 hour week at the relevant shift allowance rate which included the individual productivity allowance and monthly team performance payment.

Issues decided by the EAT

  1. The EAT ruled that non-guaranteed overtime and other supplemental payments that are intrinsically linked to the performance of the tasks must be included in holiday pay calculations. In other words, “normal pay” is pay that is normally received, and the pay must have an intrinsic or direct link to the work the worker is required to carry out. In applying these principles, the EAT held that the radius and travelling time allowances (applicable to the Amec & Hertel employees) are part of normal remuneration as these are payment for time spent travelling to various sites;
  2. However, the EAT Decision applies only to holiday pay in respect of WTD annual leave (i.e. 20 days.) Therefore the 8 days of additional leave under the WTR does not have to include these amounts;
  3. Significantly, claims for historical holiday pay are expected to be limited as the EAT found that an underpayment in respect of holiday pay which is separated from the next such underpayment by a period of more than 3 months, will be out of time for a claim to be brought.

What this means in practice

  1. Holiday pay should be equivalent to a worker’s “normal pay.” In cases where the pattern of work is settled it will be easy to establish what normal pay includes. In others, Members will need to consider whether the payment in question has been made for a sufficient period of time to justify that label. We are of the view a Tribunal will take into account the regularity and pattern of payments when assessing what payments should be included as part of “normal pay”;
  2. The types of overtime pay that must be factored into holiday pay include:- Overtime which is compulsory for the worker and is regularly required;
    – Overtime which cannot be unreasonably refused and is regularly required;
  3. The EAT did not deal with purely voluntary overtime (overtime the employer is not obliged to offer and the worker is not obliged to accept), however initial reactions to the Decision are generally of the view the following is likely to be applied:- Overtime which is voluntary but worked regularly may fall within the scope of “normal pay” and should therefore be factored into holiday pay;
    – Overtime which is voluntary, occasional and irregular may be out of scope on the basis it would fail the “normal” test
  4. It is not clear whether the Decision endorses the 12 week reference period to calculate holiday pay; we foresee issues arising where the 12 week period is not representative of normal working and pay, particularly where a worker’s pay is highly variable throughout the year;
  5. The findings apply to WTD annual leave (i.e. 20 days) only and not to the additional 8 days provided under the WTR. The likely effect of this is that workers will receive a higher rate of holiday pay (that includes overtime and various other applicable payments) for 20 out of their 28 days’ holiday per year, with the remaining 8 days being paid at basic rate. In practice this has the potential to give rise to payroll complications;
  6. What is potentially helpful is that the EAT Decision includes an opinion (which is not binding) that these 8 additional days are the last 8 days to be agreed upon by the employer and the worker in that year. Workers cannot choose which leave is covered by the WTD with a view to attracting a higher rate of pay;
  7. This may also have the effect of limiting claims for historical holiday pay. The EAT concluded that workers could not claim any holiday underpayment forms part of a series of deductions from wages (i.e. an unlawful deduction from wages claim) where more than 3 months has elapsed between the deductions. This could be a 3 month period where the worker took no holidays, or a 3 month period which includes holiday payments for WTR or contractual leave (but not WTD leave.) This part of the Decision severely restricts the scope of backdated claims as the likelihood of a worker having a long series of untaken WTD holiday over a number of years that has not been separated by a further period of WTR leave, is minimal.

What happens next?

Leave to appeal on all issues has been granted to the Court of Appeal. However, the EAT Judge has indicated any appeal on the issue of including non-guaranteed overtime in the calculation of holiday pay is unlikely to be successful, but that the prospect of success on the time point is more difficult to call.

The Secretary of State for Business, Innovation and Skills, Vince Cable has announced the Government is putting together a task force to look at ways to limit the impact of the Decision. Whilst employment law is a devolved matter in Northern Ireland, the trend is that we align ourselves with GB in any matters where there has been an interpretation of European law. Consequently, we anticipate Northern Ireland will adopt the same approach as GB.

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