Holiday pay question getting ready to land

There was a sense of fear from businesses that they may have to pay out millions in backdated holiday pay. Picture: Getty
There was a sense of fear from businesses that they may have to pay out millions in backdated holiday pay. Picture: Getty
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Large consequences likely from ruling, says Donna Reynolds

Unless you had entered hibernation, you couldn’t have escaped the media frenzy surrounding the long-awaited holiday pay ruling from the Employment Appeal Tribunal in Bear Scotland Limited v Fulton and others.

The excitement on Twitter as the clock ticked down was palpable. There was a sense of fear from businesses, distressed they may have to pay out millions, perhaps billions, as some big business lobby groups claimed, in backdated holiday pay – and when the news broke that people working overtime can claim extra holiday pay, everyone rushed to voice their opinion on one of the most important developments in employment law in recent years. The government scrambled a taskforce to limit the impact of the decision, merchants of doom spoke about businesses folding and opportunists spoke of large payouts for workers – but pragmatists knew, even before the judgment, that this would not be the final word.

Until British Airways plc v Williams, the calculation of holiday pay was a simple, logical matter or, at least, the rules were clearly set out. The Working Time Regulations 1998, which implement the Working Time Directive, provide that workers are entitled (subject to the pro rata principle for part-time workers and those who commence or terminate their employment part way through the year) to 5.6 weeks’ annual leave. This is an enhancement of the four weeks provided for by the Directive. Regulation 16 of the WTR states “a worker is entitled to be paid… at the rate of a week’s pay in respect of each week of leave”. We then looked to sections 221-224 of the Employment Rights Act 1996 for the week’s pay rules. Put simply by Employment Judge Camp in his judgment in Williams: “Crudely: a week’s pay for those with normal working hours is what they get paid for working those hours for one week; a week’s pay for those with no normal working hours is their average actual weekly remuneration.” That average is over a period of 12 weeks.

Therein lay the problem. Were workers with normal working hours being short-changed under the WTD because basic salary did not include additional bonuses or commission payments? Yes, said Williams, and the decision established normal remuneration would include payment linked intrinsically to the performance of tasks which a worker is contractually required to perform. The subsequent case of Lock v British Gas held that remuneration included contractual commission.

But what of overtime? One of the issues in Bear Scotland Limited was whether non-guaranteed overtime only should be included in holiday pay calculations. Non-guaranteed overtime, where the extra hours are not guaranteed but when available workers cannot refuse to work them, is very different from voluntary overtime.

Immediately, the scope of the decision is limited to a very specific class of payment and employers can reduce their imagined wage bill – for now. There is the small matter of the expected further appeal and, given European case law and the decision of the Employment Tribunal in Neil v Freightliner that voluntary overtime was intrinsically linked to the job, it’s likely voluntary overtime will also be included in holiday pay calculations. But it will take further litigation to get to a settled position.

There are silver linings in this judgment for businesses. There was a great concern that claims could be backdated to 1998. However, the requirement for the underpayment of holiday pay to have been made in the past three months or for it to be one of a series of underpayments, the last of which was made in the past three months and with no more than three months between each underpayment, put paid to that. Businesses can also reduce their imagined wage bill because the ruling is limited to four weeks’ annual leave.

The journey will be turbulent. Lock was referred back to an Employment Tribunal from the Court of Justice of the European Union to be applied but this has been delayed to February 2015. Leave to appeal (to the Court of Appeal) was granted in Bear Scotland Ltd on the key issue of backdated holiday pay. The government may legislate depending on the findings of its task force.

Unions will look to make multiple claims to protect members. Employers unwilling to wait for clarity may look to alternative ways to reduce wage bills. More circle-to-land than final approach for now.

• Donna Reynolds is a partner with CCW Business Lawyers