Mark Stevens looks at how the Employment Appeal Tribunal’s decision will affect your business and what to do to minimise its impact.
Following the Employment Appeal Tribunal’s (EAT) decision in the holiday pay case of Bear Scotland Ltd v Fulton & another, there were very few media outlets that did not include emotive words such as ‘timebomb’, ‘floodgates’ and ‘ruin of small businesses’ somewhere within their reports of the decision. But what will be the real impact of the decision for firms, and to what extent should they change their existing arrangements?
The question of what payments should be made to an employee while they are on annual leave has been developing since the introduction of the right to paid annual leave in the Working Time Regulations 1998 (WTR), which sought to implement the European Union’s Working Time Directive into UK law. Under the WTR, a week’s pay for the purposes of calculating the amount of holiday pay is based on an employee’s normal working hours – their basic pay, in other words, with non-guaranteed overtime hours being ignored.
That view changed with the European Court of Justice’s decision in Williams v British Airways which determined that an airline pilot’s holiday pay should include remuneration that is ‘intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment’. In the subsequent case of Lock v British Gas Trading Limited, a salesman successfully argued that his holiday pay should take into account the commission that he usually received – otherwise he would be deterred from taking annual leave. The stage had been set for an employee to claim that their holiday pay calculation should take into account overtime payments that they received for working non-guaranteed overtime. This was the subject of the claimant’s claim in the Bear Scotland case, with the decision handed down by the EAT on November 4, 2014.
In Bear Scotland the claimants, with the support of union Unite, argued that compulsory, non-guaranteed overtime should be included as “normal pay” for the purpose of calculating holiday pay.
The EAT agreed with this argument, finding that, for the purposes of calculating holiday pay, ‘normal pay is pay which is normally received’. However, is it really as simple as that? Looking in detail at the decision three key points emerge.
Firstly, the EAT decision only considered obligatory ‘non-guaranteed’ overtime. This is overtime that a worker is required to work if requested by their employer but which the employer is not obliged to offer. This is not the same as ad-hoc or voluntary overtime, and so some uncertainty still remains as to whether overtime which is not guaranteed and which is truly voluntary for the employee will fall within the scope of ‘normal pay’.
Next, the entitlement only applies to the basic entitlement of four weeks’ annual leave under EU law and does not apply to the additional 1.6 weeks’ leave entitlement under national law. This potentially serves to limit an employer’s exposure to both back pay and arrangements for the future.
Lastly, the EAT also held that travel time payments which exceed expenses incurred, and which amount to additional taxable remuneration, should also be included as ‘normal pay’ when calculating holiday pay.
Backdated holiday pay
There has been considerable concern over the impact of this ruling on employers, particularly the possibility for claims to be backdated to 1998 when the WTR was introduced. Employers will be relieved to hear that the EAT held that any break of three months between underpayments of holiday entitlement will ‘break the chain’. This means that a worker could only, it seems, bring a claim for those deductions that occurred after the most recent period of three months during which no deductions were made.
Where now from here?
First of all the decision is likely to be appealed, potentially by both parties. The government and business leaders have criticised the decision and the burden that will be placed on employers. The unions will be disappointed with the decision to limit the scope for claiming back pay. Business Secretary Vince Cable immediately announced that he is setting up a task force to assess the possible impact of the ruling – so further commentary is likely.
The uncertainty, however, doesn’t help employers now. Employers should consider their potential exposure to additional holiday payments by looking at their pay structures and existing overtime arrangements. A review of holiday pay records would also be sensible to look at potential costs if a challenge is raised.
In terms of action points, employers should consider whether they do nothing until legal issues are resolved. This might cause accrued liabilities to increase – particularly if guaranteed overtime is common in the business.
They could change their approach to calculating holiday pay and pay in accordance with the new decision going forward. This deals with future liability. As time passes, workers’ ability to bring future claims will diminish in light of the time frames for bringing a claim.
Alternatively, employers could seek to settle any past underpayments. While this offers certainty, and avoids potential litigation, there is a risk that an employer could overpay – particularly if the legal position changes again in the future.
What is clear is that, while the decision may be appealed, employers will want to manage their potential liability for backdated holiday pay by assessing their employees’ potential claims and, depending on the extent of that liability, engaging with those employees in order to find an agreed way forward.