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Holiday pay

What’s the story?
In a nutshell, the issue is that the European Working Time Directive gives employees the right to holiday pay, but does not fully explain how that entitlement is to be calculated. The threat for employers at the moment is that, if it turns out they have been calculating holiday pay “incorrectly,”  they could see mass claims, conceivably even dating back to 1998 (on a worst-case scenario), when the WTD came into force.
How did it begin?
In 2011, in Williams and others v British Airways plc, the European Court of Justice ruled that a worker is entitled to holiday pay that reflects not only his or her basic salary, but also other “remuneration which is intrinsically linked to the performance of tasks which he is required to carry out under his contract of employment” and for which the worker receives monetary payment as part of his or her total pay-packet. What does that mean in practice? The pronouncement sparked off a whole new set of claims seeking an answer to that question.  
Earlier this summer, the ECJ decided in Lock v British Gas that, following the principle it had outlined in the Williams case, paid commission ought to be taken into account when calculating an employee’s holiday pay.  The Court determined that Mr Lock’s commission was “intrinsically linked” to his role as a salesman, and therefore his holiday pay ought to reflect these typical commission earnings.
As you can imagine, the ECJ’s logic could also cover analogous payments such as overtime, bonuses, shift allowances, and other pay supplements (depending on the circumstances).

Where are we now?
On Tuesday 4 November, the Employment Appeal Tribunal in the linked test cases of Woods v Hertel and Fulton v Bear Scotland issued its much-anticipated ruling. Here are some of the key points to take away from it:  

The EAT confirmed that any overtime that a worker cannot refuse must count as part of that worker’s “normal pay,” and therefore must be factored in to the holiday pay calculation. The judgment does not say in black and white that voluntary overtime must be included, but there’s perhaps an argument that it falls within the scope of the principles outlined above.  That question will be for another tribunal.

A big question was whether the Government had put in place legislation to keep the UK in line with European law. The EAT decided that the UK Working Time Regulations 1998 can be interpreted in such a way as to comply with the requirements of the European Working Time Directive. This means the cost of any holiday pay claims cannot be laid at the Government’s door (for failure to implement EU legislation), and in principle employers will be responsible for meeting the costs of compensation.

The EAT distinguished between UK employees’ two types of annual leave: the 20 days of “European leave” under EU law, and the extra 8 days granted by UK legislation. The European rules affecting holiday pay only apply to the European leave. Then, proceeding on the basis that underpaid holiday claims would be claims for the “unlawful deduction of wages”, which can only be brought within three months of the last in a series of deductions, the EAT decided that a gap of more than three months between underpaid “European holidays” in one holiday year and the next holiday year would break the chain of deductions. Employees will not be able to decide in retrospect what was “European leave,” and what was not, so as to create an unbroken series of deductions. This means that the scope for claims stretching years back could well be limited.

What’s Next?
However, it seems almost certain that this ground-breaking decision will be appealed, and so the issue could end up back in the UK Supreme Court. The Department of Business, Innovation & Skills has also announced the creation of a task force to look at the impact of the ruling on employers.
In the meantime, it may be prudent for employers to reflect on the way they manage and record staff overtime, performance-related pay, and other equivalent salary supplements. They should also look out for updates on this issue.
For further information or to discuss any holiday pay requirements, please contact Robert Holland or any of the Employment team at Balfour+Manson.
Disclaimer: The views and opinions expressed in this article site are soley those of the original authors and other contributors and do not purport to give specific legal advice.
Also in this month’s employment law MATTERS:

The upcoming introduction of shared parental leave

Sex discrimination based on unequal paternity/maternity pay

The latest Tribunal case on a Facebook-related dismissal

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