Holiday Pay in 2015: Legal Briefing

A recent decision of Employment Appeal Tribunal (EAT), which held that workers’ holiday pay should include payments made in addition to basic pay, has potentially far reaching implications for employers in the hospitality sector.

We invite Laurence O’Neill, associate solicitor with Legal 500 firm Morrisons Solicitors, to explain the case and its implications for hoteliers in 2015.

NOTE: this article was originally published as part of the 2015 Strategic Yearbook, available for download here: http://www.hotel-industry.co.uk/downloads/2015-strategic-yearbook/

WHAT IS THE HISTORICAL POSITION IN RELATION TO EMPLOYEES’ HOLIDAY PAY?

For many years the position in UK law for any employee with normal working hours was that holiday pay was paid at the rate of basic pay only.

Payments for things such as overtime, commission, performance bonuses and attendance allowances did not have to be included.

Many employees felt this unfair: why should they receive less whilst on holiday than whilst working? So ran the argument.

THE TIDE BEGINS TO TURN

It was an argument long-resisted by the courts, but the tide began to turn in employees’ favour in Williams v British Airways 2011.

In Williams, the European Court of Justice (ECJ) held that employees’ holiday pay should represent their “normal remuneration” and should include amounts in respect of all remuneration “linked intrinsically” to the performance of tasks which employees are contractually obliged to perform.

This meant that BA pilots were entitled to receive, as part of their holiday pay, certain allowances that were previously only paid whilst they were flying.

The Williams decision was followed by Lock v British Gas 2014.

In Lock, the ECJ commented that workers should not receive less pay for holiday than for work, otherwise they might be discouraged from taking holiday, which would undermine the health and safety objectives of the European Working Time Directive (WTD).

Following Williams and Lock several claims were brought in UK tribunals.

These included the claims of Bear Scotland & Others, Hertel UK Ltd and Amec Group in which employees claimed that payments including non-guaranteed overtime, performance bonuses and attendances allowances should be included in their holiday pay.

In all three tribunal cases the employees succeeded. All three were appealed to the EAT where they were combined and heard together under the lead case of Bear Scotland between 30 July and 1 August 2014.

THE EAT’S DECISION

The EAT gave judgment on 4 November 2014. It confirmed that holiday pay must reflect “normal pay” and should include payments linked intrinsically to the performance of tasks required to be carried out under workers’ contracts.

In summary:

  • Where the worker can be required to work overtime such payments should be included in the holiday pay calculation.
  • No definitive ruling was given on whether purely voluntary overtime should be included. Acas has commented in its guidance that ‘it may also be that regular voluntary overtime should be included if it is part of a worker’s normal remuneration’. This remains a grey area.
  • Certain allowances comprising payment for time spent travelling to various sites (but not travel expenses) should be included.
  • Although the claims being heard did not include commission the Judge referred to commission on sales being included in holiday pay as a ‘settled view’ of the ECJ suggesting that it should be included.

The implication of the EAT’s decision is not just that employers should start including additional payments in employees’ holiday pay going forward but also that employees have been underpaid and have claims against their employers for back pay.

Employer organisations feared an influx of claims for back pay and a Government task force was established to assess the impact of the judgment and make recommendations.

HOW FAR BACK IN TIME CAN CLAIMS FOR BACKDATED HOLIDAY PAY BE MADE?

The time limit for filing an employment claim for unlawful deductions of underpaid holiday is three months (unless not reasonably practicable) from the date of the last deduction.

Workers can claim for a series of unlawful deductions. Although never tested, the prevailing view is that such a series could stretch as far back as 1 October 1998, when the UK first brought the WTD into UK law through the Working Time Regulations 1998, or the start of the employee’s employment, whichever is the most recent.

There are two significant measures, however, which will limit the extent of back pay claims:

  • ONE: The first is that, in its judgment, the EAT held that where there is a gap of three months or more between deductions this will break the series of deductions that an employee can claim for. Given most employees’ holiday pattern, it should be common to find a gap of three months between underpayments in the not too distant past.
  • TWO: The second is that, just before Christmas, the Government, following the recommendations of its task force, announced that it would legislate to limit the extent of back pay claims to two years. However, in the name of proportionality, the two year cap will only come into force for claims issued on or after 1 July 2015.

WHAT IS THE IMPACT ON EMPLOYERS?

The Judgment in Bear Scotland does not give all the answers in what remains a complex area of law.

For example, it is not clear what payments will be considered to form part of employee’s “normal pay”. Should purely voluntary overtime be included? Highly relevant in the service industry, should tips be included? There seems no obvious reason why not.

Further there has been no guidance given on what reference period employers should use to calculate an employee’s “normal pay”.

Should they take an average over, say, the 12 weeks earnings leading up to the employee’s holiday (a method applied elsewhere in UK law) or should it be some longer period?

A longer period would certainly help to prevent employees from benefiting from windfalls by taking holiday immediately following a particularly busy time of year where their normal pay is unusually high.

In terms of future payments, until there is further guidance, either through case law or legislation, employers will have to take a view about whether and how to start including additional payments in their workers’ holiday pay.

Where this results in significant extra expenditure, they will also have to look at taking steps to make savings elsewhere, perhaps, for example, by declining to award planned pay increases or by reducing the amount of overtime or commission that is offered.

SHOULD I EXPECT BACK PAY CLAIMS?

In terms of back pay, whether this judgment will lead to the mad rush of claims that was first feared remains to be seen.

The three-month-gap principle established by the EAT and the subsequent government move to cap claims at two years will ultimately prove to reduce the incentive for employees to bring claims.

Coupled with the fact that employees will now have to stump up tribunal fees and that, in most cases, they will still be employed and may not wish to upset their employers, perhaps the initial view of an influx of claims was somewhat overstated.

That being said, where despite the disincentives, there is an appetite to bring claims – perhaps in highly unionised environments in particular – the Government’s move to cap all claims to two years from 1 July 2015 is likely to act as a touchstone and, if claims are coming, employers should expect to see them before then.

About Laurence O’Neill: O’Neill is an Associate Solicitor with Legal 500 firm, Morrisons Solicitors. Morrisons has been providing legal services to businesses for almost 300 years and is one of Surrey’s leading firms, with offices in Redhill, Woking, Wimbledon, Camberley and Teddington.
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