Holiday pay: turning up the heat

Holiday pay was undoubtedly the hot topic for employment lawyers in 2014. Two significant rulings were the subject of discussion both before and after the decisions were given – Lock v British Gas Trading Ltd (C-539/12, 22 May 2014), and Bear Scotland v Fulton and Baxter; Hertel (UK) Ltd v Wood; Amec Group Ltd v Law, Employment Appeal Tribunal (EAT), 4 November 2014.

The right to holiday pay

It is widely known and long accepted that workers have the right to be paid during holidays. The Working Time Directive, incorporated into UK law in 1998 through the Working Time Regulations, grants workers a minimum of four weeks’ leave each year. The intention of the Directive is to ensure minimum rights for workers to protect their safety and health.

For many years it has been unclear whether holiday pay calculations should take account of additional payments, such as overtime, shift premiums and commission ordinarily paid to workers with variable pay arrangements. Holiday pay has therefore ordinarily been calculated on a worker’s basic rate of pay.

Lock v British Gas Trading Ltd

In May 2014, the landmark European Court ruling in Lock was headlined as the case that would bring many UK businesses to a standstill.

The court ruled that for reasons of safety and health, a worker should be paid a sum equal to their normal pay during periods of statutory holidays. A failure to take into account additional payments, such as commission, when calculating holiday pay could be a disincentive for workers taking adequate rest periods and contrary to the safety and health objectives of the Working Time Directive. This is for the simple reason that workers would earn less during periods of holiday than they would ordinarily receive when at work.

The court therefore decided that payments intrinsically linked to the performance of tasks that workers are required to carry out under their contract should be taken into account when calculating holiday pay.

The ruling affects millions of UK workers with variable pay arrangements, who should now have those additional sums taken into account when calculating holiday pay.

Back pay claims – post-Lock

Lock was hailed by UK workers as a bright new dawn of happier and better-paid holidays.

For business, the future looked bleak. Lock meant that individuals were potentially due thousands of pounds by way of back pay for underpaid holidays, through unlawful deduction from wages claims. Long-serving individuals employed with the same employer since as far back as 1998 were thought to be eligible to make wages claims going back to 1998 when the Working Time Directive was incorporated into UK law. It appeared a new mass litigation era was upon us.

Bear Scotland v Fulton

Bear Scotland threatened to put the mass litigators back into hibernation.

The EAT decided that when claiming for a series of underpayments, a break of more than three months between a particular underpayment and the preceding underpayment would “break the chain”, meaning that workers would lose the right to make a claim for deductions earlier than the underpayment following the break. Hence, if there has been a gap of more than three months between two periods of holiday, which can often be the case, the chain of deductions for back pay purposes is broken and the worker cannot make a claim going back further than the later holiday. In addition (among other matters), the EAT found that non-guaranteed overtime should be included in holiday pay calculations.

So, on one hand, the ruling gave many workers a substantial increase in entitlement, while on the other hand it took away and substantially limited the scope and value of back pay claims with the requirement that there can be no break of more than three months in any series of underpayments to which the holiday claim relates.

The taskforce

Swiftly responding to Bear, Business Secretary Vince Cable announced on the day of the EAT ruling that the Government would set up a taskforce to assess the impact of the judgment. Its purpose would be to discuss how to “limit” the impact on business. The taskforce includes the CBI, the Institute of Directors, the Federation of Small Businesses and the British Retail Consortium. Unsurprisingly perhaps, but disappointingly, trade unions and other employee-focused organisations were not invited to join the taskforce.

On 18 December 2014 it was announced that the taskforce has resolved to impose a cap of two years for most wages claims, including those in relation to holiday pay. In a press release, BIS stated that it was “taking action to protect UK business from the potentially damaging impact of large backdated claims”.

The press release confirmed that the proposed regulations – the Deduction from Wages (Limitation) Regulations 2014 – which had already been placed before Parliament, would apply to claims lodged on or after 1 July 2015, with claims submitted before then benefiting from the existing rules on limitation.

What next?

Employers should take advice to ensure they are meeting their obligations, and workers with variable pay arrangements should consider taking advice from, as appropriate, their union, a citizens advice bureau or lawyer on whether they have a retrospective claim and/or the right to insist on greater holiday pay going forward.

Employers might be able to take steps to limit the financial damage both in relation to their future liabilities and retrospective claims, by (for example) starting to pay overtime in accordance with the EAT judgment, thereby breaking the chain of deductions, so that their workers may not be able to make claims going back for years unless they move very quickly; looking at more creative ways to limit their liability by reviewing their remuneration structures, by for instance changing overtime and commission arrangements (all of which would need to be agreed by workers where there are contractual changes to terms and conditions); imposing a three month “ban” on taking holidays; and/or awaiting further case law before making a decision on how to manage holiday pay, in the hope that workers do not make timely claims and therefore lose the right to make claims for retrospective holiday pay.

A challenge faced by lawyers advising businesses relates to calculating holiday pay going forward, as well as calculating the value of retrospective holiday pay claims. Calculating “normal” pay will not always be a straightforward exercise, particularly for large employers with thousands of workers having varied working and pay arrangements. It is also unclear what the reference period will be in all cases for calculating “normal pay”, though it is widely believed generally to be a 12 week period.

Lawyers advising individuals will need to focus on ensuring that their clients are being paid what they are legally entitled to in the future, and ensuring their clients are aware of the need to take urgent action to protect their time limit position in relation to back pay claims (if they are minded to progress them), particularly in light of the proposed new regulations.

The two-year cap does not apply to claims lodged before 1 July 2015, so workers with back pay claims need to act quickly. Despite the limitations in Bear, workers have the right to insist on proper pay in the future. Further, those employed for shorter periods (or who have claims limited in time by Bear) could still recover high sums by way of retrospective pay, particularly where commission makes up a significant part of their remuneration. A single holiday pay claim could for some with, say high commission payments, be worth six figures.

We are now better informed on what workers should be paid, but the future of the holiday pay claim remains uncertain.