November 5, 2014

Employment Newsflash: Holiday Pay to Include Overtime - Latest in the Holiday Pay Nightmare

Arnold & Porter Advisory

On November 4, 2014, the UK Employment Appeal Tribunal weighed into the ongoing debate as to how holiday pay, (by which, for US readers, we mean vacation pay), should be calculated. Their decision:  holiday pay should include a worker's normal, non-guaranteed overtime (Bear Scotland Ltd & others v Fulton (and various conjoined cases)). This comes on the back of the momentous decision of the Court of Justice of the European Union in Lock v British Gas Trading Limited (2014) ICR 813, a few short months ago, in which the court held that holiday pay should also include commission, where this forms part of a worker's normal remuneration and is intrinsically linked to the performance of his or her contract. Employers could now see a rash of litigation, as workers seek to recover back pay, where commissions and overtime payments were not included in the holiday pay they received in the past. The Herald Scotland reported that some 400 claims are already in the pipeline and such claims could go back many years and amount to very substantial sums of money. However as we explain below, there are some important limitations on such claims which employers need to be alive to.
In theory, this new decision only applies to the four weeks of minimum holiday leave granted by the EU Working Time Directive, as opposed to all 28 days of statutory minimum holiday allowed by English law. However few employers currently distinguish between the two and take the view that "holiday is holiday."  Whether that approach will continue now that the costs of taking this generous, easy going approach could be significant, remains to be seen.
So how did we get here and what are the implications for employers?
The background:
In the EU, holiday is a health and safety issue. Employees are encouraged to take their minimum holiday entitlement and the courts have consistently ruled that holiday pay should reflect a worker's normal remuneration for the job. If an employee is paid less than their normal pay, this will discourage them from taking their full holiday entitlement and for the European lawmakers that is a problem.
Traditionally in the UK, holiday pay was based on salary alone and only compulsory and guaranteed overtime was taken into account (Evans v Malley Organisation Limited (2003)ICR 432).  Slowly but surely the Court of Justice of the European Union, ("CJEU," or the ECJ as it was once known), started eating away at the principle.  In Williams & others v British Airways Plc (Case C-155/10), airline pilots successfully argued that their holiday pay should include certain allowances that formed part of their normal pay and were intrinsically linked to performance of their contracts. In Lock (2014) the same argument was applied by CJEU in the case of salespeople earning salary and commission. The court ruled that it was unlawful for the employer to calculate holiday pay based on salary alone and that commission payments should have been included. The latest cases, decided on November 4, took the same line when it came to non-guaranteed overtime payments.
The UK government intervened in the latest case to argue the employers' corner. The EAT was not moved. In response the Business Secretary has announced a taskforce drawn from representatives of government and business to discuss how the impact on business from the November 4 decision could be limited.  For many of our clients who do not pay staff overtime, the latest decision may be less dramatic than Lock with its promise of commission payments for employees on holiday. However one can see the same principles being applied to other payments to which employees are eligible for performing their duties, such as shift payments and unsociable hours payments. Indeed in this decision, the EAT held that travel time payments which exceed expenses incurred and are therefore taxable remuneration, are also part of a worker's normal pay and should be taken into account when calculating holiday payments.
The implications:
In theory the floodgates are open for employees to make claims that their holiday pay going back years has not been correctly calculated and seeking payment in respect of the shortfall. They would argue that in effect, unlawful deductions have been made from their pay without their consent. However there is good news for employers. The time limit for bringing an unlawful deductions claim is 3 months from the date of the deduction, or the last "in a series" of unlawful deductions. It was the phrase "last in a series" of deductions that troubled many employers. Did that mean that if holiday pay had not been correctly calculated in one year and then again in another year and then again in a third year, the three periods could be seen as a series of deductions, allowing the worker to make claims over multiple years? No says the EAT. In most cases if a worker fails to sue in respect of an  unlawful deduction for 3 months, by the time the next unlawful deduction comes about, he will be out of time to sue in respect of the earlier deduction.  That is a very significant limitation on workers' abilities to mount legal claims, although a worker who is quick off the mark and has not let more than 3 months slip between underpaid holidays, could still mount a very large claim. It is this which the government and employers are worried about. It is likely that the employers in the Fulton case will appeal, in which case uncertainty will continue to reign. It is also likely that the government may try to legislate to prevent back claims over several years, even where such claims are theoretically still in time. In the meantime employers must decide whether to limit their liability and start calculating holiday pay on the basis of these court decisions, or hold fire and see what the courts ultimately decide to do.

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