27
Nov 2014
Important holiday pay ruling given in Employment Appeals Tribunal
Introduction
On 4 November 2014, the Employment Appeal Tribunal (“EAT”) handed down its judgment relating to a dispute concerning overtime and holiday pay. This follows previous rulings in the European Court of Justice (“ECJ”) which considered the relationship between certain payments such as commission and allowances, and holiday pay. The implications of this judgment therefore potentially go further than just overtime pay. These issues are examined below:
Legislative background
The Working Time Regulations 1998 (“the Regulations”) govern the entitlement to paid annual leave in the United Kingdom. The Regulations brought the provisions of the European Working Time Directive (“the Directive”) into national law.
In relation to holiday pay, the Regulations refer to different calculations in the Employment Rights Act depending on the type of contract an individual works under. Where a worker is paid an annual salary, holiday pay reflects basic salary only. Where a worker has normal working hours under the contract, holiday pay reflects pay for the contracted hours only. The calculations therefore exclude commission, overtime, allowances and bonuses.
Decisions
Recent case law has resulted in rulings which have now determined that these approaches are not compliant with the Working Time Directive, as the amount of holiday pay does not accurately reflect a worker’s true earnings.
The broad reasoning behind the decisions on holiday pay focus on the fact that, under the Regulations currently, a worker may suffer a reduction in pay when taking leave if certain payments are not taken into account. Take the example of an individual who earns £2,000 per year as a basic salary, and who earns £2,000 per month in commission. Under the current calculations, if he takes a week’s leave, he is only paid his basic salary and suffers a reduction in overall pay because he is not entitled to any commission during leave.
If a reduction in pay may be suffered by a worker, they might be deterred from exercising the right to annual leave, which would be contrary to the Working Time Directive’s purpose.
Therefore, the ECJ has concluded that payments “linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment” and payments which relate to a worker’s “professional or personal status” must be included in the calculation of holiday pay. These comments have now been followed in the recent ruling in the EAT
Which payments should be included in the calculation of holiday pay?
Type | Should it be included in the calculation of holiday pay? |
Commission | Yes. the ECJ has held that commission is intrinsically linked to the performance of work under the contract. |
Overtime | Yes. The EAT has stated that hours worked over and above a worker’s contractual hours are intrinsically linked to his performance of his role. Interestingly, though, the Judgment handed down relates to ‘non-guaranteed’ overtime; that is, overtime which the employer is not obliged to offer but that the individual is contractually required to work if offered. This does leave open the possibility of employers offering purely voluntary overtime in the future to try to avoid liability. Given the litigation in this area to date, though, it is likely the same principles would be applied by Tribunals in calculating holiday pay. |
Allowances | Yes. The EAT has confirmed that travel allowances which exceed expenses incurred (and so amount to additional taxable pay) should also be reflected when calculating holiday pay. Payments paid purely to reimburse expenses, however, will not count. |
Bonuses (for example to reflect performance, productivity or attendance) | Highly likely. An Employment Tribunal has concluded that such payments are intrinsically linked to the performance of tasks under the contract so should be included. Interestingly, the Tribunal also commented that a bonus which depends on team performance is potentially within scope. Decisions made in the Tribunal are not binding, however, but will generally be persuasive. |
Annual and discretionary bonuses | Unclear. Bonuses ordinarily relate to the performance of work under the contract so should be counted, although a Christmas bonus paid equally to all staff irrespective of service, performance etc. should be out of scope. It has been suggested that, where an annual bonus is payable, the taking of leave should not affect the amount of any payment and so there should be no reason why such amount should be included in the calculation of holiday pay. Future litigation is expected in this area, therefore. |
Stand-by and emergency call-out payments | Yes. The EAT confirmed that such payments are again intrinsically linked to the work being carried out. |
What do the judgments apply to?
The employer is only required to consider the above payments when calculating the basic 4 weeks’ leave granted by the Directive. In the United Kingdom, workers are entitled to take 5.6 weeks’ leave each year.
What this means is that the employer will effectively be expected to operate two systems of payment; one which incorporates the above payments for 4 weeks of leave, and one which incorporates basic pay only.
What reference period should apply?
The reference period in the Employment Rights Act is currently 12 weeks. Unfortunately, in the case concerning commission, the ECJ stated that it was for national courts to use a reference period that is “considered to be representative”. A period of 12 weeks has been accepted in Tribunals in the UK since, although there is no guarantee this will be followed in each case.
This could result in workers attempting to take leave after a particularly lucrative period of employment. For example, a salesman who earns most of his commission in the spring may attempt to take most of his leave in the summer to benefit from his earlier commission being taken into account for the purposes of holiday pay.
How far back can claims go?
The significant concern in advance of the recent EAT judgment was the suggestion that workers could go back as far as 1998 in claiming holiday pay arrears. This is because a worker is now entitled to bring holiday pay claims as an unlawful deduction from wages; where there are a ‘series of deductions’, a worker can link previous underpayments and potentially go as far back as 1998, when the Regulations first came into force.
However, an interesting ruling was given in the EAT on this point, which greatly limits the retrospective application of the decision. The EAT has held that, where there has been a break of more than three months between successive underpayments, any liability prior to this break will be out of time. It is unclear whether this also applies to earlier decisions relating to items such as commission and bonuses.
In relation to holiday pay, only the first four weeks of leave must be paid incorporating previous overtime, commission etc. Therefore, it is likely that, at the end of each holiday year, there will have been more than three months which have elapsed since any underpayment, which should put workers out of time for the majority of historic claims.
Current status
Unfortunately, a definitive position is unlikely to be achieved for some time. This is because:
- In the recent EAT case, permission to appeal to the Court of Appeal was granted, with particular emphasis on the issue of how far back a claim can go;
- The case law on commission payments has been judged upon in the ECJ, but has not yet been applied in a domestic Tribunal. As soon as it is applied, any decision is likely to be appealed;
- Just hours after the decision was handed down in the EAT, Business Secretary Vince Cable announced the setting up of a taskforce to assess the possible impact of the ruling. The official release from the Department for Business, Innovation and Skills stated that the discussion would focus on how the “impact on business can be limited…as a matter of urgency”. Interestingly, the members of the taskforce include seven employer’s organisations, with an absence of trade unions, law centres and employee groups.
What should we do now?
There are a number of options to consider going forwards. Again, the problem is the distinct uncertainty which surrounds the current position, which makes it difficult to assess the risk of proceeding with different options and the potential exposure to claims and compensation. The following options are analysed below:
The past:
1. Ignore past potential liabilities. Further regulation or a further appeal may eliminate historic claims, although it may be some time before clarity is reached in this respect. Workers may also be tempted to submit claims now in the hope that they will succeed once a final determination is made (whilst any such claims lodged may be ‘stayed’ at the Employment Tribunal for now, the decision of the EAT is binding on Tribunals).
2. Meet past liabilities. Going back to 1998 would, for most employers, be a time consuming and significantly costly exercise, although it removes any doubt about liability for historic claims.
Alternatively, the business could work on the basis of the ruling in the EAT recently, and go back only as far as the point at which a worker would be out of time for pursuing more historic complaints. The business would have to look at each worker individually and assess the point at which there were more than 3 months between two underpayments.
The future:
1. Ignore future liabilities. Again, further regulation or a further appeal may change the current position. There is an ongoing litigation risk with this option, though, and a worker could continue to try and link deductions going back a number of years, in the hope that the Court of Appeal allows this.
2. Work on the basis that all of the above payments count towards the calculation of holiday pay. If this approach is taken, the risk of future liability is minimized. It also breaks the chain of a series of deductions historically. However, costs may spiral depending on the constitution of a worker’s pay in a particular business, particularly where the worker is heavily incentivised with commission or where the business offers a significant amount of overtime.
3. In relation to overtime, move to state that all overtime is now purely voluntary i.e. if any overtime is offered, there is no contractual obligation on an employee to accept it. As the current ruling may only be limited to non-guaranteed overtime, this could prevent liability accruing in the future. The difficulty is that employees could not be compelled to accept overtime which may be vital to the business, though. Furthermore, future Tribunals may decide that voluntary overtime should be treated in exactly the same way as non-guaranteed overtime when calculating the amount of holiday pay.
Whichever option is taken, businesses should assess the maximum potential liability and the impact of increased costs if the case law decisions are followed going forwards. Where steps can be taken to minimise the impact going forwards, these should be taken (for example, trying to reduce the reliance on overtime).
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