We reported on Tuesday that the Employment Appeal Tribunal (EAT) had given its long-awaited decision in the key holiday pay cases of Fulton, Wood and Law, which were heard together by the EAT back in August. Our report on Tuesday summarised the main points arising from the judgement and we now set out the significance of the judgement in more detail.

The cases of Fulton etc followed the earlier case of Williams and others v British Airways plc in which the Court of Justice of the European Union (CJEU) held that during periods of annual leave, workers should receive their ‘normal remuneration’, including payments which are ‘directly and intrinsically linked’ to the performance of the tasks they are required to carry out under their contract. In other words, a worker should be paid holiday pay at the same rate as his or her ‘normal pay’. Essentially, a worker should not be paid less than they usually would just because they take holiday. The underlying principle from the CJEU’s interpretation of the Working Time Directive (WTD) is that there should not be any disincentive for workers to take their full entitlement to holiday as this would potentially be detrimental to health and safety. We set out below how this principle was applied in the EAT’s recent judgement.

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Non-guaranteed overtime must be included in the calculation of holiday pay

The judgement distinguished between 3 different types of overtime. Firstly, overtime guaranteed by the contract. Such overtime has to be provided by the employer under the terms of the contract and the worker is also obliged by the terms of the contract to undertake the overtime. Such ‘guaranteed overtime’ has long been established as forming part of the calculation of holiday pay in UK law. The second category identified by the EAT, and which was the subject of the claims of Fulton etc., was ‘non-guaranteed overtime’. This was defined as overtime which the employer is not obliged to provide but that the worker is obliged to perform by the contract if offered. The EAT held that such overtime should be included in the calculation of holiday pay. The third category of overtime identified was ‘voluntary overtime’, that is overtime which the employer is not obliged to offer and that the worker would be free to accept or decline. It remains unclear as to whether such voluntary overtime should be included in the calculation of holiday pay. However, it should be noted that the EAT’s judgement did refer to the regularity with which the claimants in Fulton etc. had been obliged to work overtime and this may therefore be a key issue in determining whether or not voluntary overtime should be included in the calculation of holiday pay or not. No doubt there will be a case in due course on the inclusion or otherwise of voluntary overtime which will hopefully clarify this unresolved issue.

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Does this part of the judgement affect all statutory holiday?

Somewhat confusingly, no is the answer to this question. Full time workers in the UK are entitled to 28 days paid holiday per year. Of these, an entitlement to 20 days derives from the WTD with the remaining 8 days entitlement deriving solely from the WTR. The EAT judgement was clear that the requirement to include non-guaranteed overtime in the calculation of holiday pay applies only to the 20 days that derive from the WTD. The requirement for the remaining 8 days is that workers are paid only for their ‘normal working hours’, which is the position under domestic case law. This leads to the obvious question as to how do employers and workers know or decide whether a particular holiday is one that derives from the WTD or the WTR? The judgement

makes clear that the view of the EAT is that it is either for the employer to decide or that the last 8 days of leave in any year are those derived from the WTR. This is on the basis that the 8 days are described as ‘additional leave’ within the WTR.

This clearly creates a very confusing situation but the EAT was clear that it was a matter for Parliament to resolve, by way of legislative change if necessary, rather than an issue for the courts. Whether this, or the next, government takes action to resolve the position remains to be seen. One option would obviously be to harmonise the differing calculations by amending the law so that the calculation of holiday pay deriving from the WTR is the same as for that deriving from the WTD. This has the appeal of being a relatively simple solution but the downside for business is that it would represent a further increase in costs. The Secretary of State for Business Innovation and Science has established a ‘task force’, consisting of representatives of various Government departments and bodies representing business, to seek to minimise the effect of the judgement on business. Some might speculate that this should have been done some years ago as this issue has not arisen overnight, but we couldn’t possibly comment.

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Backdating of holiday pay claims

Clients will no doubt have seen reports in the media that holiday claims may be made for underpayments going back all the way to 1998 (the year the Working Time Regulations, which implement the WTD in the UK, were enacted). Many doomsday scenarios have been painted with reports that claims would run into billions of pounds and that there would be widespread business failures and job losses as a result.

However, a very important part of the judgement severely limits the ability of workers to bring significant historic holiday pay claims. As many clients will know, unless there are exceptional circumstances, claims must be presented to a Employment Tribunal within 3 months of the date on which the complaint arose. The Tribunal has no jurisdiction to consider claims presented out of time. In the case of a claim for underpaid holiday pay this is usually made as a claim for an unlawful deduction from wages (UDW). Such claims can be made for a one off underpayment or for a ‘series of deductions’ where it is claimed that there have been a number of similar underpayments made over time. The time limit for bringing a claim for an UDW is 3 months from the alleged UDW, or in the case of a series of deductions, 3 months from the date of the last alleged UDW in the series. In the judgement the EAT held that for any underpayments to form the required series of deductions there must be less than 3 months between any periods of holiday. This means that whenever a worker has taken holiday, and there is a break of 3 months or more between that holiday and the next period of holiday, then that will ‘break’ the series of deductions and therefore prevent the claim from going back beyond the break.

In the overwhelming majority of cases therefore, claims for historic underpayments of holiday pay will be limited, possibly only to the last period of holiday taken.

Clients should, however, note that given the above, workers and their advisors may therefore consider other avenues, such as pursuing a breach of contract claim in the County or High Court. The limitation period for such claims is 6 years.

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Can the WTR be interpreted so as to correctly implement the WTD?

Yes, held the EAT. Clients may be aware that EU directives, such as the WTD do not apply directly in member states such as the UK (except in certain circumstances to public bodies). Rather it is for national governments to implement EU directives via domestic legislation and in the UK this was purported to have been done by the

enactment of the WTR. One of the issues the EAT had to decide on was whether or not the WTR could be interpreted so as to correctly implement the WTD. The EAT held that it could by way of inserting words into the legislation such that a different method of calculating holiday pay for holiday derived from the WTD would be created. The significance of this is that where an EU member state fails to implement an EU directive correctly it is possible for those who have suffered a loss as a result to bring claims directly against the state. In this case, if it had been found that the WTR could not be interpreted so as to correctly implement the WTD, then both workers and employers facing claims for underpaid holiday pay, could potentially have brought claims against the UK government.

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How should holiday pay now be calculated?

Elements such as commission, shift allowances, certain travel allowances and, of course, non-guaranteed overtime should now be included in the calculation of holiday pay. In short, any amount that the worker is normally paid by the employer for doing their job, rather than, for example, a reimbursement of expenses.

As stated above, it is unclear from the judgment whether genuinely voluntary overtime should be included in holiday pay. However, to be included, the pay in question should be ‘normal’, i.e. have been paid for a sufficient period of time to justify being called ‘normal’.

Therefore, where there is a settled pattern of work, and a correspondingly regular overtime payment, that overtime payment will be ‘normal’. It should therefore be included in the worker’s holiday pay. However, where payments are not so settled or regular, there might be greater scope for an employer to argue that such payments should be excluded from the calculation. However, this remains to be confirmed by a decision of the Tribunals or the Courts.

One practical way of addressing the issue however, is to consider whether or not a worker in a given situation will feel as though they are losing pay by taking holiday. If so, then that overtime or allowance should probably be included in their holiday pay as the creation of any disincentive to take leave risks infringing one of underlying purposes of the WTD, which is that workers should take all of their leave for health and safety reasons

However, for the time being, our advice is not to rush to change holiday pay arrangements given the overwhelming likelihood of an appeal by both sides against those aspects of the judgement that went against them. For example, the employers will almost certainly appeal the requirement to include non-guaranteed overtime and the Claimants will almost certainly appeal the part of the judgement that limits historical claims. Permission to appeal to the Court of Appeal has already been given by the EAT. There may also be Government intervention, including possible legislative change, to minimise the effect of the judgement. It would obviously be prudent for clients to review their policies and practices with regard to holiday pay but as above, our advice would be to adopt a ‘wait and see’ approach before making changes to the calculation of holiday pay that may be costly and ultimately unnecessary, depending on how the cases are decided in the higher courts.

Published: 11.17.14 - Posted In: Latest News