UK: The Bear Necessities

Last Updated: 16 December 2014
Article by Trevor Bettany

The judgment of the Employment Appeal Tribunal (EAT) in Bear Scotland & Others v Fulton & Others concerning the calculation of holiday pay is one of the most widely publicised and controversial employment law decisions in recent years. It has been hailed by the trade unions as a victory for workers but criticized by the Government and employers as placing unbearable pressures on business.

The EAT found that workers are entitled to holiday pay which includes normal non-guaranteed overtime which the worker is obliged to perform if required by his employer to do so.

However, the issue will rumble on. Within hours of the decision, the Government - which had made unsuccessful representations to the EAT against the expanded definition of pay - announced a taskforce to assess the possible impact of the ruling. According to its Press Office, that taskforce will look into ways of limiting its impact. More cases are following in the pipeline.

What are the key points which employers in the private sector need to know for now?

What is the background?

The Working Time Regulations 1998 (WTR) purport to implement the EU Working Time Directive (the Directive), which is essentially a health and safety directive to ensure workers are properly rested. The Directive states that full-time workers are entitled to 4 weeks (ie 20 days) paid annual leave. In the UK, WTR goes further to provide that full-time workers are entitled to an additional 1.6 weeks (ie 8 days) paid annual leave, including bank holidays.

Until recently, WTR and relevant case law provided that employers did not need to include in holiday pay a sum representing compulsory but not guaranteed overtime. Contracts of employment commonly provide for payment of only basic pay while on holiday. However, the European Court of Justice has found that article 7 of the Directive means that workers are entitled to their normal remuneration when taking holiday, insofar as that remuneration is intrinsically linked to the performance of their tasks under the contract of employment. The EAT in Bear Scotland had to consider how these principles apply to WTR in the UK.

Whilst Bear Scotland relates to overtime and travel time payments, similar issues arise in respect of commission, productivity, attendance, performance and possibly other allowances (such as "acting up"), standby or call-out payments and potentially even to discretionary performance bonuses.

What did Bear Scotland decide?

The EAT has confirmed that WTR can be interpreted purposively to comply with and implement the Directive, despite the inconsistency between EU and UK law as to how holiday pay should be calculated.

The key points decided by the EAT were:

  • overtime - workers are entitled to holiday pay which includes normal non-guaranteed overtime;
  • 4 weeks leave - however, that right applies only to the basic 4 weeks days leave granted under the Directive (and not the additional 1.6 weeks days under WTR);
  • back pay - workers will be out of time and cannot therefore claim arrears of holiday pay (by arguing that there has been an ongoing series of unlawful deductions from holiday pay wages) if there has been a break of more than 3 months the dates upon which holiday was taken without the appropriate payment having been made. However, workers may try to argue that it was not reasonably practicable to have commenced the claim within 3 months of the last such deduction.
  • travel time allowances – taxable payments, which exceed reimbursement of expenses actually incurred, should also be included when calculating holiday pay.

What are the main implications?

Overtime

Guaranteed overtime (ie where the employer must provide work as overtime and pay for the work even if he has none to offer) was not at issue in Bear Scotland. It must be reflected in holiday pay.

Non-guaranteed overtime (ie overtime which the employer is not obliged to provide but which the worker must undertake if required to do so) is now to be treated as part of the normal remuneration of an employee intrinsically linked to the performance of his tasks – where (as in Bear, the facts show that the employee was required to work overtime with sufficient regularity to be regarded as "normal remuneration). It should therefore also be paid.

The position on voluntary overtime (ie overtime which the neither the employer is obliged to provide nor the worker is obliged to undertake) is unclear, as the workers in Bear Scotland were bound to accept non-guaranteed overtime. However, it may be is at least arguable on the particular facts that genuinely voluntary overtime is not part of the normal remuneration of a worker. This may be the appropriate stance for employers to take for the time being, in the absence of clear authority to the contrary. However, the EAT did comment that "Normal pay" is that which is normally received" – so that presumably overtime could be included where there is a clear pattern.

The reference period for calculating overtime to be included in holiday pay remains unclear. It will presumably be calculated by reference to the average during the preceding 12 weeks, unless the nature of the payment demands otherwise.

Back Pay

The time bomb by which employers were most concerned was the risk of claims for arrears of holiday pay going back potentially to the introduction of WTR in 1998.

However, employers will be relieved that the EAT significantly reduced the scope for challenge by finding that:

  • a gap of more than 3 months in any alleged series of deductions will prevent a worker from bringing claim;
  • workers cannot retrospectively designate which of the holiday taken amounts represents the 4 weeks leave under the Directive in order to create a longer unbroken series of alleged deductions. Instead, the 4 weeks' leave will be deemed to be the first holiday taken (unless otherwise provided by the contract or determined by the employer).

Therefore, record keeping is critical, to enable an employer to demonstrate that an employee has gone more than 3 months without taking holiday and is therefore out of time.

Workers who are aware of their rights (particularly those encouraged by the unions to pursue them) may present repeated claims in the Tribunal to avoid the risk of being out of time, despite the need to pay fees in order to do so.

Surprisingly, it was announced last week that Unite the Union had decided not to appeal against the part of the judgment limiting the ability of workers to bring retrospective claims – despite the court having granted leave to appeal on what it recognised as an issue of public importance. However, the ongoing risk of claims remains. Many claims have already been lodged. Those claims may challenge the current position on retrospective claims. Further, workers who have not yet lodged claims are likely to do so promptly, before they are too late.

What should employers do?

The future is uncertain.

It is likely that the employers will appeal to the Court of Appeal against the finding that WTR can be interpreted to give effect to the Directive. Whilst the EAT commented that any appeal would not have reasonable prospects of success, it noted the importance of the issues, the considerable publicity attracted and the benefit of "a definitive resolution."

In the meantime, more claims are waiting in the wings (including Lock v British Gas concerning commission and holiday pay, which has been relisted for 4 February 2015). The Government's taskforce may recommend urgent action.

In the circumstances, it may be too early for employers to change holiday pay (or commission or similar) arrangements or negotiate settlement of claims for arrears. However, employers must be mindful of the risks and potential increased liability in assessing and accruing to meet the risk and in negotiating individual recruitments and terminations.

In the short term, employers may have to consider practical arrangements to try to manage risk including:

  • accruing against the risk of claims
  • managing when workers are entitled to take holiday, in order to engineer gaps of 3 months to restrict retrospective claims – including by designating leave as attributable to the Directive rather than WTR, refusing or deferring requests for leave
  • managing when workers are entitled to take holiday, in order to prevent them from taking holiday after a period of significant overtime which might increase the normal average remuneration and therefore the costs of meeting the liability
  • seeking to agree with employees a moratorium on payment of overtime or related payments as part of holiday pay, without prejudice to the rights of either employer or employee.

In the longer term, despite potential challenges, our view is that the obligation upon employers to include normal remuneration in holiday pay will remain. We speculate that amendments to WTR may build in protections to limit the risk of back pay, but the Government could again face challenges to such legislation. However, subject to being forced by workers into adopting a particular position, employers face the following broad choices:

  • wait and see – await the outcome of appeals, further decisions or the outcome of the Government's taskforce
  • accrual – accruing against the risk of claims with a view to meeting those claims or seeking a negotiated settlement if and when necessary
  • active changes - include overtime (and comparable) payments in holiday pay – to avoid future claims and ensure a clear break on the chain of any alleged series of deductions, but risking miscalculating the payments and even overpayment; altering the nature or pattern of overtime
  • funding additional cost – ultimately employers are likely to fund the additional cost of meeting holiday payments by freezing or reducing wages or offering less generous commission, allowance payments or benefit schemes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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