Tweet
Introduction
The calculation of statutory holiday pay has been the subject of a string of litigation which has finally received some clarification in the recent EAT decision Bear Scotland Ltd v Fulton and others UKEAT 0047/13 handed down on 5 November 2014.
Despite the response of employer’s organisations such as the CBI and British Chambers of Commerce that the decision will cost business billions of pounds which could result in job losses the effect of the decision is actually quite limited in terms of the amount of back pay that workers can recover. It does though make clear that employers cannot get away with just paying basic pay when workers are on holiday. This briefing sets out the background to the law on statutory holiday pay which ultimately lead to the EAT’s decision.
Background to statutory holiday pay
Traditionally the right to holidays and holiday pay for workers has been the result of collective bargaining. However, in October 1998 the Working Time Regulations 1998 (‘WTR’) came into force and introduced for the first time a statutory right to paid holidays. The WTR implemented the Working Time Directive 1998 which was introduced to improve the working environment and protect workers’ health and safety by, amongst other things, ensuring workers receive adequate rest.
Working Time Directive
The Working Time Directive provides that “every worker is entitled to paid annual leave of at least 4 weeks” (Article 7) subject to conditions set out in national legislation. The Working Time Directive does not set out how holiday pay is calculated other than to provide that holiday pay cannot be replaced by an allowance in lieu (except on termination of employment). The aim being that as a health and safety measure, holiday should be taken to allow workers adequate rest.
The Working Time Regulations
The WTR provide for a maximum of 5.6 weeks leave subject to a maximum of 28 days including Bank Holidays. The 5.6 weeks leave is made up of 4 weeks holiday under Regulation 13 and 1.6 weeks leave under Regulation 13A. The significance of this is that the WTR provides for statutory holiday above and beyond the 4 weeks provided by the WTD.
In terms of holiday pay, Regulation 16 of the WTR provides that holiday pay should be calculated on the basis of a “week’s pay in respect of each week of leave”. A week’s pay is calculated in accordance with the provisions of the Employment Rights Act 1996 (‘ERA’). These provisions are set out in Sections 221to 224. These provisions are complicated because the amount of a week’s pay differs depending on the circumstances. Broadly speaking, how much statutory holiday pay a worker receives depends on whether a worker works “normal” working hours or has “no normal” working hours.
Normal working hours are where the contract of employment provides for fixed working hours. For example, where the contract provides “your normal working hours are 37 hours per week”. In that case, a week’s pay is based on the 37 hour working week.
Generally, no normal working hours applies where working hours may vary according to production need. For example, where the contract provides “your normal working hours will not be less than 37 ˝ hours per week and you will be paid on the basis of production hours which are those necessary to complete the tasks allocated to you”. In that case, the contract provides that the worker will be paid according to production hours even though there are minimum hours set out in the contract. In that case, a week’s pay is calculated on the basis of an average earnings assessed over a 12 week period. The 12 week average will, therefore, take into account all remuneration including bonuses, overtime and commission worked within that 12 week period.
Where the amount of pay varies with the amount of work done, for example, in the case of piece workers, a week’s pay includes any other payments which vary in amounts such as bonuses and overtime. Note though, where the commission is based on results rather than the work performed, it is not generally included.
Case law developments
There has been a significant body of case law as to what holiday pay should include. In particular, the European Courts have held as long ago as 2006 that paid annual leave meant that “workers must receive their normal remuneration for that rest period” (Robinson-Steele v R D Retail Services Ltd [2006] ICR 932). This was subsequently endorsed by the case of Stringer v Revenue and Customs Commissioner [2009] ICR 932 which held that “the purpose of the requirement of payment for that leave is to put the worker during such leave in a position which is, as regards remuneration, comparable to periods off work”.
In the UK the Court of Appeal in Bamsey v Albon Engineering Manufacturing Plc [2004] IRLR 457, held that compulsory overtime could not be regarded as normal working hours and should not, therefore, be included in the calculation holiday pay.
In that case Mr Bamsey had a basic working week of 39 hours but worked on average 60 hours a week in the 12 weeks prior to taking leave. His holiday pay was based on his 39 hour week even though overtime was compulsory. The Court of Appeal held only overtime which was guaranteed - in the sense that the employer was required to offer overtime and the employee was required to undertake overtime - counts as normal working hours and is included in the calculation of holiday pay. As Mr Bamsey’s overtime was not guaranteed, he was not therefore entitled to include the overtime hours he had worked in the calculation of his holiday pay. The effect of this case meant that workers who were claiming holiday pay under the WTR and who were obliged to work overtime (even though the employer was not obliged to offer it) were only entitled to be paid statutory holidays at basic rate.
Of course, that did not mean that all workers only received basic pay for holidays where they had worked overtime as the Union may have negotiated collective agreements which provide for more than the statutory entitlement. For example, under Agenda for Change. Para 13.9 provides:
“Pay during annual leave will include regularly paid supplements, including any recruitment and retention premia, payments for work outside normal hours and high cost area supplements. Pay is calculated on the basis of what the individual would have received had he/she been at work. This will be based on the previous 3 months at work or any other reference period that may be locally agreed.”
So, unless an employer was acting in breach of contract, workers in the NHS should receive all allowances including overtime worked in the calculation of holiday pay.
Recent developments The above position – i.e. basic pay for holiday pay – was effectively challenged in the case of British Airways v Williams [2012] ICR 847.
The case concerned the rate of holiday pay for airline pilots and, in particular, as to what elements of pay should be included when calculating holiday pay. In that case, the pilots pay consisted of 3 elements:
The case was referred to the European Court which held that those payments that should be included in the calculation of holiday pay include:
The Court decided that it was for the national court to assess the intrinsic link between the various elements which make up total pay of the worker and which the worker is required to carry out under their contract of employment.
The Court distinguished these payments from those which were intended to cover occasional or ancillary costs i.e. expenses which do not have to be included in the calculation of holiday pay.
As a result of that judgment, a number of cases were considered in the Employment Tribunals specifically in relation to allowances and overtime which workers were obliged to work even though the employer was not obliged to offer it. Test cases were run in the case of Bear Scotland Ltd and Ors v Fulton and Ors [2014] UKEAT/0047113.
In addition, the European Court gave judgment in UNISON’s case of Lock v British Gas Trading Ltd C-539/12 concerning whether or not holiday pay should take into account commission earned.
In the case of Lock Mr Lock was an energy sales consultant for British Gas. Although he received holiday pay which took into account the commission he had earned prior to his holiday, the European Court considered that his future pay would be adversely affected. This was because during the period of his holiday, he would not be earning any commission. As commission made up a significant part of his pay, in his case, 60%, the Court held that the holiday pay should include commission calculated according to an average over a reference period. The Advocate General suggested that 12 months may be the appropriate reference period but the European Court did not determine this point. The case has now been referred back to the Employment Tribunal to determine how holiday pay should be calculated taking into account commission. The case is due to be heard in February 2015.
In the case of Bear Scotland Ltd, the Employment Appeal tribunal took into account the effect of the decisions in Williams and Lock and held:
The current position
It is now clear that where a worker is obliged to work overtime, even if the employer is not required to provide overtime, that overtime payments should be included in the calculation of holiday pay. This is referred to as non-guaranteed overtime.
Issues which remain unclear
It is not entirely clear whether true voluntary overtime should be included within the calculation of holiday pay. Employers are likely to argue that any overtime which is offered can be refused by the employee and, therefore, should not be included within the calculation of holiday pay. However, commentary within the judgment suggests that where payment has been made for a sufficient period of time to be regarded as normal pay, such as, where voluntary overtime is regularly worked and there is an expectation that the employee will work overtime to get the job done, then voluntary overtime may count as part of normal pay and should, therefore, be included in the calculation of holiday pay.
Whether these should be included in the calculation of holiday pay will be dependent on whether there is an “intrinsic or direct link to the tasks which the worker is required to carry out (stressing those last 4 words)”. It is arguable that the test could apply to the following allowances:
The ERA 1996 provides that as regards normal pay then the calculation should be over a 12 week period prior to the first day of annual leave taken. The European Court in Williams considered that where elements of pay were intrinsic to the workers tasks the amount to be included should be assessed over a representative period. Applying that test could mean that where allowances are more likely to be incurred at a certain period of time say in relation to commission payments which may vary according to the time of year, then a more representative period may be 12 months. Indeed, the Advocate General in the case of Lockconsidered that a 12 month reference period was appropriate.
Conclusion
The strict approach taken by the EAT in Bear Scotland Limited and others means that most back pay claims will be of low value.
The calculation of statutory holiday pay has been the subject of a string of litigation which has finally received some clarification in the recent EAT decision Bear Scotland Ltd v Fulton and others UKEAT 0047/13 handed down on 5 November 2014.
Despite the response of employer’s organisations such as the CBI and British Chambers of Commerce that the decision will cost business billions of pounds which could result in job losses the effect of the decision is actually quite limited in terms of the amount of back pay that workers can recover. It does though make clear that employers cannot get away with just paying basic pay when workers are on holiday. This briefing sets out the background to the law on statutory holiday pay which ultimately lead to the EAT’s decision.
Background to statutory holiday pay
Traditionally the right to holidays and holiday pay for workers has been the result of collective bargaining. However, in October 1998 the Working Time Regulations 1998 (‘WTR’) came into force and introduced for the first time a statutory right to paid holidays. The WTR implemented the Working Time Directive 1998 which was introduced to improve the working environment and protect workers’ health and safety by, amongst other things, ensuring workers receive adequate rest.
Working Time Directive
The Working Time Directive provides that “every worker is entitled to paid annual leave of at least 4 weeks” (Article 7) subject to conditions set out in national legislation. The Working Time Directive does not set out how holiday pay is calculated other than to provide that holiday pay cannot be replaced by an allowance in lieu (except on termination of employment). The aim being that as a health and safety measure, holiday should be taken to allow workers adequate rest.
The Working Time Regulations
The WTR provide for a maximum of 5.6 weeks leave subject to a maximum of 28 days including Bank Holidays. The 5.6 weeks leave is made up of 4 weeks holiday under Regulation 13 and 1.6 weeks leave under Regulation 13A. The significance of this is that the WTR provides for statutory holiday above and beyond the 4 weeks provided by the WTD.
In terms of holiday pay, Regulation 16 of the WTR provides that holiday pay should be calculated on the basis of a “week’s pay in respect of each week of leave”. A week’s pay is calculated in accordance with the provisions of the Employment Rights Act 1996 (‘ERA’). These provisions are set out in Sections 221to 224. These provisions are complicated because the amount of a week’s pay differs depending on the circumstances. Broadly speaking, how much statutory holiday pay a worker receives depends on whether a worker works “normal” working hours or has “no normal” working hours.
Normal working hours are where the contract of employment provides for fixed working hours. For example, where the contract provides “your normal working hours are 37 hours per week”. In that case, a week’s pay is based on the 37 hour working week.
Generally, no normal working hours applies where working hours may vary according to production need. For example, where the contract provides “your normal working hours will not be less than 37 ˝ hours per week and you will be paid on the basis of production hours which are those necessary to complete the tasks allocated to you”. In that case, the contract provides that the worker will be paid according to production hours even though there are minimum hours set out in the contract. In that case, a week’s pay is calculated on the basis of an average earnings assessed over a 12 week period. The 12 week average will, therefore, take into account all remuneration including bonuses, overtime and commission worked within that 12 week period.
Where the amount of pay varies with the amount of work done, for example, in the case of piece workers, a week’s pay includes any other payments which vary in amounts such as bonuses and overtime. Note though, where the commission is based on results rather than the work performed, it is not generally included.
Case law developments
There has been a significant body of case law as to what holiday pay should include. In particular, the European Courts have held as long ago as 2006 that paid annual leave meant that “workers must receive their normal remuneration for that rest period” (Robinson-Steele v R D Retail Services Ltd [2006] ICR 932). This was subsequently endorsed by the case of Stringer v Revenue and Customs Commissioner [2009] ICR 932 which held that “the purpose of the requirement of payment for that leave is to put the worker during such leave in a position which is, as regards remuneration, comparable to periods off work”.
In the UK the Court of Appeal in Bamsey v Albon Engineering Manufacturing Plc [2004] IRLR 457, held that compulsory overtime could not be regarded as normal working hours and should not, therefore, be included in the calculation holiday pay.
In that case Mr Bamsey had a basic working week of 39 hours but worked on average 60 hours a week in the 12 weeks prior to taking leave. His holiday pay was based on his 39 hour week even though overtime was compulsory. The Court of Appeal held only overtime which was guaranteed - in the sense that the employer was required to offer overtime and the employee was required to undertake overtime - counts as normal working hours and is included in the calculation of holiday pay. As Mr Bamsey’s overtime was not guaranteed, he was not therefore entitled to include the overtime hours he had worked in the calculation of his holiday pay. The effect of this case meant that workers who were claiming holiday pay under the WTR and who were obliged to work overtime (even though the employer was not obliged to offer it) were only entitled to be paid statutory holidays at basic rate.
Of course, that did not mean that all workers only received basic pay for holidays where they had worked overtime as the Union may have negotiated collective agreements which provide for more than the statutory entitlement. For example, under Agenda for Change. Para 13.9 provides:
“Pay during annual leave will include regularly paid supplements, including any recruitment and retention premia, payments for work outside normal hours and high cost area supplements. Pay is calculated on the basis of what the individual would have received had he/she been at work. This will be based on the previous 3 months at work or any other reference period that may be locally agreed.”
So, unless an employer was acting in breach of contract, workers in the NHS should receive all allowances including overtime worked in the calculation of holiday pay.
Recent developments The above position – i.e. basic pay for holiday pay – was effectively challenged in the case of British Airways v Williams [2012] ICR 847.
The case concerned the rate of holiday pay for airline pilots and, in particular, as to what elements of pay should be included when calculating holiday pay. In that case, the pilots pay consisted of 3 elements:
- A fixed annual sum;
- A supplement for flying time; and
- A supplement which varies depending on the amount of time spent away from base.
The case was referred to the European Court which held that those payments that should be included in the calculation of holiday pay include:
- Any inconvenient aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided;
- All components of the total remuneration which relate to personal and professional status.
The Court decided that it was for the national court to assess the intrinsic link between the various elements which make up total pay of the worker and which the worker is required to carry out under their contract of employment.
The Court distinguished these payments from those which were intended to cover occasional or ancillary costs i.e. expenses which do not have to be included in the calculation of holiday pay.
As a result of that judgment, a number of cases were considered in the Employment Tribunals specifically in relation to allowances and overtime which workers were obliged to work even though the employer was not obliged to offer it. Test cases were run in the case of Bear Scotland Ltd and Ors v Fulton and Ors [2014] UKEAT/0047113.
In addition, the European Court gave judgment in UNISON’s case of Lock v British Gas Trading Ltd C-539/12 concerning whether or not holiday pay should take into account commission earned.
In the case of Lock Mr Lock was an energy sales consultant for British Gas. Although he received holiday pay which took into account the commission he had earned prior to his holiday, the European Court considered that his future pay would be adversely affected. This was because during the period of his holiday, he would not be earning any commission. As commission made up a significant part of his pay, in his case, 60%, the Court held that the holiday pay should include commission calculated according to an average over a reference period. The Advocate General suggested that 12 months may be the appropriate reference period but the European Court did not determine this point. The case has now been referred back to the Employment Tribunal to determine how holiday pay should be calculated taking into account commission. The case is due to be heard in February 2015.
In the case of Bear Scotland Ltd, the Employment Appeal tribunal took into account the effect of the decisions in Williams and Lock and held:
- Overtime which a worker is obliged to work but which the employer is not obliged to provide must count as part of normal pay and should, therefore, be included in the calculation of holiday;
- Taxable elements of pay for time spent travelling amounts to normal pay and should be included in the calculation of holiday pay. The EAT considered that time spent travelling was sufficiently linked to work and could be distinguished from claiming travel expenses, such as reimbursement for a train ticket or bus fare which should not be included in the calculation of holiday pay;
- The WTR, as drafted, were incompatible with the WTD but could be interpreted so as to give effect to the Directive. The practical effect is that the principles established in the European cases can be applied to the WTR and applies to both public and private sector employers;
- A claim for underpayment of holiday pay can be brought as a claim for unlawful deduction from wages. However, the Court held that a series could not be established if there was a gap of more than 3 months between each unlawful deduction in respect of the 4 week holiday taken.
The current position
It is now clear that where a worker is obliged to work overtime, even if the employer is not required to provide overtime, that overtime payments should be included in the calculation of holiday pay. This is referred to as non-guaranteed overtime.
- Commission too should also be included in the calculation of holiday pay as per the UNISON case of Lock. Furthermore, the worker’s normal remuneration should not be adversely affected as a consequence of taking holiday pay which prevents them from earning the commission.
- Payments for personal and professional status such as acting up payments should be included in the calculation of holiday pay
- The enhanced calculation (i.e. to include elements of pay which are intrinsic to the workers tasks and payments for personal or professional status) only applies to the first 4 weeks annual leave under Regulation 13 of the WTR. It does not apply to the 1.6 weeks leave provided for under Regulation 13A WTR. It does not apply to contractual holiday unless there is a contractual provision or collective agreement incorporated into the contract which provides for holiday pay to include overtime, allowances and acting up payments ( as per 13.9 of Agenda for Change).
- Taxable elements of travel allowance which is paid for time spent travelling and which is linked to the work should be included
- Expenses should not be included in the calculation of holiday pay.
- Where periods of holiday are underpaid and separated by a gap of more than 3 months it will not be possible to recover back pay for previous underpaid holidays.
- The time limit for lodging a claim for holiday pay is now limited to 3 months less 1 day from payment for the last day of the first 4 weeks holiday. So, for example, where a worker works a 5 day a week a claim for underpayment of holiday pay would have to be brought within 3 months less 1 day of the date payment was made for the 20th day of holiday taken.
Issues which remain unclear
- Voluntary overtime
It is not entirely clear whether true voluntary overtime should be included within the calculation of holiday pay. Employers are likely to argue that any overtime which is offered can be refused by the employee and, therefore, should not be included within the calculation of holiday pay. However, commentary within the judgment suggests that where payment has been made for a sufficient period of time to be regarded as normal pay, such as, where voluntary overtime is regularly worked and there is an expectation that the employee will work overtime to get the job done, then voluntary overtime may count as part of normal pay and should, therefore, be included in the calculation of holiday pay.
- Other allowances.
Whether these should be included in the calculation of holiday pay will be dependent on whether there is an “intrinsic or direct link to the tasks which the worker is required to carry out (stressing those last 4 words)”. It is arguable that the test could apply to the following allowances:
- Shift premia;
- Standby payments;
- Emergency call out payments;
- Incentive bonuses;
- How intrinsic payments are to be calculated.
The ERA 1996 provides that as regards normal pay then the calculation should be over a 12 week period prior to the first day of annual leave taken. The European Court in Williams considered that where elements of pay were intrinsic to the workers tasks the amount to be included should be assessed over a representative period. Applying that test could mean that where allowances are more likely to be incurred at a certain period of time say in relation to commission payments which may vary according to the time of year, then a more representative period may be 12 months. Indeed, the Advocate General in the case of Lockconsidered that a 12 month reference period was appropriate.
Conclusion
The strict approach taken by the EAT in Bear Scotland Limited and others means that most back pay claims will be of low value.
xx
Comment