Every worker has the statutory right to 5.6 weeks’ paid holiday a year. Sounds straight forward to calculate? Unfortunately, it has proved to be anything but.
In 2012, the Court of Justice of the European Union in Williams v British Airways plc confirmed that a worker must be no worse off financially during annual leave than if they had continued working. Since then, the tribunals have seen several claims concerning whether overtime, commission and allowances form part of ‘normal remuneration’ for holiday pay purposes. This is important for businesses as it directly affects their operating costs and margins.
We now have the highly anticipated judgment of the Employment Appeal Tribunal (EAT) in the combined cases of Bear Scotland Ltd v Fulton, Hertel (UK) Ltd v Woods and Amec Group Ltd v Law considering whether some workers been underpaid, and if so how far back can they claim?
Calculating holiday pay
Under the Working Time Regulations 1998 (WTR) a worker is entitled to 5.6 weeks holiday leave paid “at the rate of a week’s pay” calculated in accordance with complicated ‘week’s pay’ rules in the Employment Rights Act 1996 (ERA). Basically, “normal working hours” are those fixed by the contract. This includes basic hours plus contractually guaranteed overtime. However, non-guaranteed/voluntary overtime is excluded even if worked regularly.
Following Williams, the EAT has confirmed that under the EU Working Time Directive, overtime, including non-guaranteed overtime and other allowances “intrinsically linked to the performance of the tasks” must be included in holiday pay, saying “normal pay is that which is normally received”. In cases where the pattern of work is settled, it will be fairly easy to determine the normal pay. Where there is no such “normal” an average should be taken over a reference period.
This means that not only contractually guaranteed overtime must be included in calculating holiday pay, but also non-guaranteed and voluntary overtime which is regularly worked. What is still excluded is irregular/erratic voluntary overtime.
Regulation 13 v regulation 13A leave
The new wider definition of a ‘week’s pay’ only applies to the first four weeks of holiday entitlement under regulation 13. This is because only regulation 13 leave derives from the Directive. The additional 1.6 weeks under regulation 13A is a matter of UK law only. As the Directive requires a wider definition to “normal pay”, the UK tribunals are obliged to interpret the WTR accordingly but only in relation to rights derived from the Directive.
This means workers may be entitled to a higher rate of holiday pay for regulation 13 leave than for regulation 13A additional leave.
Holiday pay claims can be brought as a series of “unlawful deduction of wages” contrary to s13 ERA. Provided the claim is brought within three months of the last deduction in the series, tribunals have allowed workers to link together a series of underpayments going back several years, regardless of the length of time that had elapsed between each underpayment.
In a crucial new development, the EAT has held that if there is a gap of more than three months between any two deductions in the chain, the ‘series’ of deductions is broken.
This part of the judgment, limiting the number of years a worker may potentially look back, is of great significance. The chances of a worker having a long series of underpaid regulation 13 leave, is minimal.
What does this mean?
Going forward, overtime regularly worked, whether guaranteed contractually or not, must be taken into account in calculating the first four weeks of holiday pay. This will inevitably lead to a considerable rise in holiday pay bills for many employers. However, the potential value of back claims has been significantly cut for now.
Leave to appeal has been given. A successful appeal on the issue of how holiday pay should be calculated seems highly unlikely; however, the prospect of success on the “series of deductions” issue is much more difficult to call.
Connie Cliff is an associate at Wragge Lawrence Graham & Co
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