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Holiday Pay

12 January 2017

A number of requests have been received by the ECA Employee Relations department from members regarding developments on holiday pay.  Advice had been issued to members as the law evolved in both 2014 and 2015, and this article is primarily to remind members of the current state of play.

 

In late 2014, the Employment Appeal Tribunal (EAT) delivered its decision on Bear Scotland v Fulton (and conjoined cases) in which it ruled that for the first four weeks of leave in a holiday year, for employees who worked and received additional payment for regular, non-contractual overtime or received payment for travel time, this non-contractual overtime and travel time payment should be reflected in their holiday pay. EAT decisions can form precedents for the future which ECA members need to consider carefully when calculating annual leave payments.

Background

The basis for the EAT decision is a European Court Of Justice (CJEU) ruling in which the CJEU ruled that holiday pay must include any payments that are intrinsically linked to the tasks required under the worker’s contract which he or she would have received if he or she had not been on holiday. The EAT found that payments for regular but non-contractual overtime and payments for travel time fell within the category of payments that were intrinsically linked to tasks required under the employees’ contract of employment.

Another CJEU decision featured commission payments and holiday pay. In this case, the CJEU ruled that where an employee received commission some time after the period in which it was ‘earned’, employers must give an average of the preceding twelve weeks commission for the period during which the employee is on annual leave and therefore unable to earn any commission. This notional commission would then be payable at a later date - i.e. at the same time as it would have been payable if the employee had worked and earned the commission for the period he had been on leave.

EAT Decision

The EAT in the Bear Scotland and other cases made the following findings on the issue of the calculation of holiday pay:

  • Overtime which is regularly worked but is not guaranteed must be included in the calculation of holiday pay
  • Travel time payments should be included in the calculation of holiday pay

The EAT clarified that the above requirements on the calculation of holiday pay would only apply to holiday entitlement of four weeks under the Working Time Directive. Holiday pay for the additional 1.6 weeks holiday entitlement or any additional contractual holiday pay does not have to include non-guaranteed overtime or travel time payments. The EAT further stated it can normally be assumed that the first four weeks in a holiday year are holidays emanating from the Working Time Directive. These are important factors in assessing the potential claims for recovery of underpaid holiday pay in the past.

Under UK domestic legislation, if an employee does not receive pay that was due to him or her under the contract of employment, the employee can bring an employment tribunal claim of ‘unlawful deductions from wages’. Where there are a series of ‘unlawful deduction from wages’, the employee can bring a claim for all the deductions provided that the last deduction was within three months of the claim being submitted.

The EAT has however made an important distinction on potential claims seeking payment for underpayment or ‘deductions’ from holiday pay in the past. It has ruled that claims are restricted not only where the last ‘deduction’ was within three months but also that a series of deductions claims is limited to where there is a gap of not more than three months between each of the deductions.  In addition, UK legislation has now been amended so that any award for a series of unlawful deductions is limited to two years.

What Next?

In the meantime, there are a number of steps employers can take to minimise their liability for claims of unlawful deductions. Firstly, employers could ensure that employees are informed, in writing, that the first four weeks of leave in each holiday year forms their entitlement under the Working Time Directive and:

  • Immediately pay holiday pay in accordance with the EAT decision for the first four weeks of holiday pay in the current holiday year
  • Ensure that in future, holiday pay for the first four weeks of each holiday year, meets the requirements of the case law outlined above
  • Consider whether other payments such as shift work premia which are normally paid should be included when calculating holiday pay for the first four weeks of each holiday year.

Any changes to the calculation of holiday pay should be accompanied with a written statement to the effect that you reserve the right to amend the calculation of holiday pay, up or down, in the future in accordance with developments in case law and statute. This would allow you to change back to ‘basic’ holiday pay in the event that a future appeal from the employers (Bear Scotland and others) is successful.

When calculating what additional payments should be included in the holiday pay, the law requires employers to take an average over the preceding twelve weeks of the payments to be included in holiday pay.

JIB member companies are reminded that above guidance should be applied in addition to the wording under Rule 13 of the JIB agreement on the calculation of all JIB holiday pay entitlement. 

ECA will continue to push for legislative change to minimise the impact of this case.

Employers wishing to discuss the impact of the recent case law on their own business should contact the ECA Employment and Skills Department on 020 7313 4804.