We provide some further analysis and guidance on the recent decision in the Employment Appeal Tribunal on holiday pay (sometimes the relevant cases are referred to as ‘Hertel’ or ‘Bear’) (the “judgment”).
The judgment confirmed that workers have the right under Article 7 of the Working Time Directive to be paid “normal remuneration” during their four weeks “EU leave”
What aspect of pay does the recent judgment cover?
It is clear that the recent judgment applies to non-guaranteed compulsory overtime.
There are three types of overtime:
1. Guaranteed and compulsory overtime
• The employer is contractually obliged to give overtime and the worker is contractually obliged to accept overtime.
• Typical in traditional manufacturing environments, it has always been covered by UK Law.
• Overtime in such circumstances is treated as normal hours for holiday pay purposes.
2. Non-guaranteed but compulsory overtime
• The employer is not contractually obliged to give the worker overtime but the worker is contractually obliged to accept overtime when it is offered.
• What happens when the worker is not under the terms of their contract obliged to accept overtime but in practice is required to do so, i.e. they will not be offered overtime again if they refuse?
• There are legal arguments in favour of the employer. The practice of being in reality obliged to accept overtime could be a term implied into an employment contract by custom and practice. An implied contractual term would be trumped by an express contractual term that workers do not have to accept overtime. However, in circumstances where a worker is, in reality, expected to agree to overtime an Employment Tribunal may be sympathetic and favour the worker.
3. Voluntary overtime
• The employer is not obliged to give and the worker is not obliged to accept overtime.
• Though this is the most comment type of overtime, litigation has not yet determined whether holiday pay should be calculated to include voluntary overtime hours worked.
• It is perhaps only a matter of time, however, before another case arises involving voluntary overtime. The pendulum seems to be swinging in favour of workers.
Whilst the judgment related clearly to the calculation of holiday pay on the basis of non-guaranteed compulsory overtime hours worked, it did not deal with other regular payments that are not consolidated into basic pay such as voluntary overtime, annual bonuses, or other payments that are regularly paid to workers such as attendance allowances or unsociable hour allowances. The law has not yet concluded whether such payments should be included in the calculation of holiday pay.
Given the underlying logic in recent decisions that workers should not be dis-incentivised from taking holiday because they would be paid less for that period than they would usually receive when not on holiday, it is likely that most of those payments will ultimately form part of a calculation of holiday pay. This is particularly so in light of the recent Lock decision that concluded that commission that forms part of regular income should be included in the calculation of holiday pay.
It is our view, however, that annual bonus payments can be distinguished. They do not form part of usual pay and so, aside from one-off instances; from month to month workers should not see a reduction in their holiday pay in comparison to their usual monthly pay.
Is the judgment law yet?
The judgment is the law today. It applies to both public and private employers. In principle, it applies retrospectively to 1998, when the European Working Time Directive was implemented into UK Law. The decision, however, only applies to European holiday entitlement which for full-time workers is 4 weeks (20 days).
This is to be distinguished from UK/domestic entitlement of an extra 1.6 weeks (8 days) to which the judgment does not apply. The additional 8 days were introduced into domestic law so that workers would receive their 20 days under European law plus 8 days to represent bank holidays in England and Wales.
In addition to European and UK/domestic holiday entitlement, some employers may also offer additional contractual holiday entitlement, which would also not be affected by this judgment.
Note: There is no automatic entitlement to work or not to work bank holidays, subject to any contractual provision to the contrary. For that reason the 8 additional domestic days of leave are treated as normal days of holiday that may fall on a bank holiday or may be taken in lieu of the bank holiday at a different time.
What is the back pay rule following the Judgment and how does it apply in practice?
The judgment provides that the assumption is that in any holiday year the holidays taken by a worker will be deemed to be the 4 weeks of European holiday entitlement first and then the UK/domestic entitlement thereafter, followed by any contractual holiday entitlement. That assumption applies unless there is an express contractual provision to the contrary. In fact many contracts already expressly provide that this is the case so it is worth checking the wording of your employment contracts.
So, whilst workers could in theory claim back pay from 1998, they will (as is consistent with most Employment Tribunal claims that can only be brought within three months of the alleged breach/unlawful deduction), be limited to claims for back pay where there has been a continuous series of unlawful deductions from wages without a break of three months where there were no unlawful deductions.
Assuming people take holidays in one to two week chunks, in typical holiday years that run from January to December or the financial year of May to April, workers will likely take time off during half-term periods in May, during the Summer holidays, and at Bank Holidays. As has already been set out, Bank Holidays are treated as normal holiday and therefore any Bank Holidays that are taken off work will form part of the European Law holiday entitlement. Once European holiday entitlement has been exhausted, workers will move on to taking their UK/domestic entitlement and then any contractual entitlement. It is likely that this will amount to a period of 3 months where holiday pay will be calculated on the correct basis (given that the judgments on overtime/commission do not apply to UK or contractual holiday entitlement) and therefore no unlawful deductions will have been made. This would therefore result in a break of more than three months in the chain of unlawful deductions.
As a brief example, if an employer’s holiday year runs from 1 January until 31 December, and an employee takes the final day of their European holiday entitlement on 1 August, then the employee will be out of time to bring a claim for this period from 1 November. This is because between 1 August and 31 December the employee will be using either their UK/domestic or contractual holiday entitlement, and hence there would be no further unlawful deductions during this period. The chain of unlawful deductions would therefore be broken.
Consequently, the potential back pay liability will most likely not be substantial for most employers.
The risk of higher back pay liability will arise in the following circumstances:
1. Workers who do not take their full holiday entitlement and therefore have not yet exhausted their European holiday entitlement.
2. Workers who take odd days here and there and are less likely to have a 3 month gap between taking European holiday and therefore between unlawful deductions taking place.
What is the likelihood of an appeal?
Both sides to the recent decision are still considering an appeal. The latest date by which either party can appeal is 22 December 2014 (as there is a longer period to appeal in Scotland). We consider that the Trade Union is likely to appeal the back pay point because that aspect of the judgment has the weakest reasoning.
Should employers settle now? If so, when, and for how much?
Many Unions have already lodged claims which have been stayed pending the judgment. However, if claims have not already been lodged against your company, it may be possible to reach a collective settlement via ACAS where a nominal amount is offered for a limited period of back pay on the basis that there will be few back pay claims. Employers may wish to take that approach and consider amending the approach to holiday pay calculations going forward on the basis that liability in relation to back claims would crystallise prior to any possible appeal by the Trade Union which could result in the liability for back pay being extended. However, as there is a limited period of time to wait until we are certain about whether an appeal will be submitted, an alternative approach is not to deal with back pay at this moment.
In terms of the future approach adopted by employers, there is nothing in the recent judgment that determines how averages should be calculated for the purpose of holiday pay. However, the approach taken in the judgment is to add words to the Working Time Regulations, which effectively requires employers to treat a worker who regularly performs overtime as having “no normal working hours” and therefore the implication is that the provisions relating to the calculation of holiday pay for workers with no normal working hours in section 224 of the Employment Rights Act should apply. Section 224 provides for average pay to be calculated for the 12 week period preceding the holiday.
However, such a calculation may no longer be fit for purpose in a modern workplace and employers may want to implement something more sensible that appears representative of average hours worked. For example, employers such as bars and restaurants where staff work erratic hours on an ad hoc shift basis, a 12 week average of overtime may suffice. For employers who have intense periods of activity annually, such as a peak period over Christmas, a 52 week average would most likely suit as the average would not be distorted by an intense period of overtime in the weeks prior to holiday being taken in January. Whilst this may amount to a technical breach under the Working Time Regulations, it has the attraction of apparent fairness. It is hoped that the wording of the Working Time Regulations is something that the government will address in due course.
Strictly speaking, the judgment affects workers who are not salaried. However, it may encompass those who are salaried but whose employment contract does not contain a provision to the effect that overtime will be worked as required as part of their role. In those instances, where staff receive overtime the employer would go back to the same principles i.e. is the overtime worked compulsory? If yes, the overtime should be taken into account in the calculation of holiday pay.
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