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Emma O'Connor
Emma O'Connor,
HEAD OF TRAINING
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The Perils of Paying Holiday – New EAT Decision
10 November 2014

Various horror headlines have been printed as to how last week’s EAT decision will cripple UK business. BIS has even set up a taskforce to review the impact of the decision on businesses. But, are the horror stories to be believed or has the EAT’s judgment sought to balance competing rights between workers and employers?

The Legal Background

The cases that were before the EAT last week concern the long running and on-going conflict between the European Working Time Directive and the UK’s Working Time Regulations as to how holiday pay should be calculated. Under European laws, workers are entitled to 4 weeks paid annual leave each year – this was extended in 2009 by the UK giving workers an ‘additional’ 1.6 weeks holiday. This distinction between ‘basic’ holiday and ‘additional’ holiday is important as you will see.

However, differences in interpretation between the UK and EU laws have created uncertainty for businesses as to what is and what is not included within the calculation of holiday pay and over what reference period should holiday pay be calculated. Although the Working Time Directive is silent on the issue of how workers should be paid during holiday, the European Court of Justice (ECJ) back in 2011 stated that basic European holiday of 4 weeks should be based on “normal remuneration”, including any payments linked intrinsically to the performance of the worker’s tasks under their contract. This has culminated in an ECJ decision this year concerning commission and holiday pay, where again the ECJ ruled that basic holiday pay should be calculated according to normal earnings, including commission that would have been earned had the worker not been away. One must remember that holiday is a health and safety requirement and workers should not be penalised financially for taking holiday. The other complication, is that under UK laws, holiday pay is calculated by reference to a ‘week’s pay’ which is the average earnings a worker earned in the 12 weeks before taking holiday (Employment Rights Act 1996). With this background, how did the EAT approach the cases last week?

Bear Scotland Ltd v Fulton and Others (EAT)

The EAT decision last week concerned cases where, amongst other things, non-guaranteed overtime pay had not been included within holiday pay calculations.

1.    Does non-guaranteed overtime count for holiday pay purposes?

Yes – The EAT considered the permanence of the payments and the time over which they had been paid. The Court considered the payment to be part of ‘normal remuneration’ for the purposes of calculating holiday pay and any such payments paid should be included within the calculation of a ‘week’s pay’. The EAT also held that the UK’s Working Time Regulations could be interpreted in line with European law on this issue.

2.    Can workers bring a claim for unlawful deductions of wages? And if so, how far back can workers go?

Yes, if a worker has not been paid sufficient holiday pay they can bring a claim against their employer for unlawful deduction of wages. Non-payment of the correct amount of holiday is a deduction in their wage. How far back can claims go? This was the most controversial part of the judgment; with the finding that not only did the claim have to be commenced within three months of the last deduction but that if there was a break of more than three months between deductions the chain in the series of deductions was broken. This is indeed a positive decision for employers.

3.    Does the inclusion of variable pay apply to ‘basic’ holiday and ‘additional’ holiday?

Again, the EAT has been helpful to employers – including these variable elements of pay, these ‘add on's’ to the basic salary, need only be applied to four weeks’ basic holiday and not to the additional 1.6 weeks’ holiday. (This also applies where the employer offers enhanced contractual holiday over and above 20 days). Holiday also includes Bank Holidays. The EAT concluded that the worker takes their basic holiday first at the start of the holiday year and additional holiday after this. Whilst this might not help the employer that pays commission or bonus at the start of their holiday year as such payments would fall within the 12 week window before someone took holiday in the first quarter of the year, it will help with any unlawful deduction from wages argument as any additional holiday taken at the end of the holiday year will undoubtedly go some way to breaking any chain in an unpaid holiday pay claim. For many workers it will mean that the ability to link successive years’ holiday together is likely to prove problematic, if not impossible. To that extent, the prospect of claims going back many years may well, for the moment, have receded.

For the Future

This judgment is effective immediately and sets out the law as it stands today. Workers will be able to rely and act upon it. However, it seems inevitable, given the importance of this issue, that there will be an appeal to the Court of Appeal. Leave has been given for there to be an appeal, although the EAT has commented that it considers point 1 highly unlikely to be overturned. It did, however, acknowledge that point 2 above is arguable and that is likely to be of most concern to employers.

Our Employment Team is working with clients to assess their current and historic risk in underpaid holiday pay claims. If your business pays variable payments to its workers, this decision is of relevance to your organisation, particular, if your business pays bonuses to its staff.

To discuss the risks of this judgment for your business please contact our Employment Team on 0118 952 7284 or contact us via our website or email address [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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