UK: What To Watch Out For In 2015: Why Is Holiday Pay An Issue?

Last Updated: 22 December 2014
Article by Adam Lambert

In the run up to the New Year, each week the Clyde & Co employment team will be exploring a topical issue which is likely affect employers during 2015.

Historically, for workers with a normal hours and a normal weekly basic pay, holiday pay has just included basic pay, and has not included other forms of pay such as commission or overtime.

However, the ECJ in Lock v British Gas (Case C-539/12) in May 2014 said that workers should not be discouraged from taking leave by having to experience a drop in pay when they do. More specifically it held that that holiday pay should include sales-based commission. That case has now gone back to the UK employment tribunal.

In November 2014, in the much publicised decision in the conjoined cases of Bear Scotland, Hertel and Amec, the EAT held that workers who routinely work overtime as part of their contractual duties should receive a payment for such overtime when they are on holiday.

To which holiday do these decisions apply?

The UK Working Time Regulations 1998 (WTR) provide for 5.6 weeks of holiday each holiday year. The EU Working Time Directive provides for just four weeks (EU holiday). The EAT said that the right to have overtime included in holiday pay applies only to EU holiday. It seems the same must also apply to commission.

This raises the question of which leave taken by an employee in a year is EU holiday and which is the additional 1.6 weeks. This has not mattered before, but it does now because EU holiday pay is likely to be higher.

The judge in Bear Scotland stopped short of a decision on this point, but he suggested that it would be logical to assume that EU holiday is used up first in a holiday year.

Nevertheless, if a worker receives four weeks of pay including an element overtime/commission in any holiday weeks, it will be difficult for a worker to show the rules have been breached.

Can any shortfalls in holiday pay, which may go back many years, be recovered in a tribunal?

This was the biggest fear for employers. The EAT said that backdated claims can only go back until there is a gap of more than three months between periods of underpaid holidays. As the underpayments only apply to the EU holiday, and not all holiday, such gaps are very likely to have occurred recently. Therefore, the EAT decision has greatly limited back pay claims. However, this is the part of the EAT decision that seems the most exposed to future challenge.

Which types of overtime are included in holiday pay?

The EAT, referring to Lock and an earlier ECJ case, said that where overtime pay is part of "normal remuneration" and is "linked intrinsically to the performance of tasks which the worker is required to carry out under his contract of employment" this should be reflected in holiday pay.

This therefore leaves it open to some employers to argue that the overtime their workers undertake does not need to be taken into account because it is irregular (and therefore not "normal") and/or it is voluntary (and therefore not "the performance of tasks which the worker is required to carry out").

The point was not decided by the EAT, as the cases before it dealt with overtime that was fixed and treated as compulsory, and indeed was arguably not overtime at all.

How do employers calculate holiday pay?

Under the WTR, holiday pay is calculated by reference to weekly pay, drawing a distinction between workers with "normal" hours and those with "no normal hours". For employees in the latter category, pay has been calculated according to the average pay over a reference period of 12 weeks prior to the holiday.

As a result of the recent cases it seems likely that the same averaging-out will need to be carried out for all workers who receive commission and overtime covered by the recent decisions, even if a worker is on leave for just one day.

With commission, there is a time lag between the actual work that triggers commission and payment. Therefore, the shortfall in pay does not occur whilst the worker is on holiday – it occurs later. This brings into question whether the 12 week averaging-out before someone goes on holiday actually works with commission.

What can we expect in 2015 (and beyond)?

You can see from the cases above that there are still questions unanswered. Although the latest reports are that the EAT decision last month will not be appealed, the Bear Scotland part of the case needs to go back to the employment tribunal, which could in due course lead to further appeals. In addition, the Lock case is scheduled to be heard in the employment tribunal in February 2015, and there are many other holiday cases waiting in the wings.

We can therefore expect to see further decisions dealing with:

  • Backdated claims, potentially challenging the restrictions on such claims put in place in the EAT decision
  • Whether voluntary overtime and/or irregular overtime need to be taken into account
  • How to calculate holiday pay to take into account overtime and commission
  • Who decides which holiday is the (higher paid) EU holiday

In addition, the European Commission has launched a review of the Working Time Directive with a view to consulting on possible changes to the legislation. With responses due by 15 March 2015, next year may lead to some changes, although we shouldn't expect anything revolutionary.

Back in the UK, the Department for Business Industry and Skills (BIS) has set up a task force to address the issue of claims for holiday pay in the wake of the EAT's decision on overtime. This is quite openly with the interests of businesses rather than the interests of workers in mind. But with the UK's hands tied by the Working Time Directive, and votes to be won in the forthcoming election, it is likely to progress at an even slower speed than the courts and tribunals.

With Christmas approaching, what businesses and workers would really like to see under the tree is a degree of certainty.

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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