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Holiday pay: Q and A

Everybody is taking about holiday pay. You can’t have missed the media coverage this month sparked by the decision in the case of Fulton v Bear…

Everybody is taking about holiday pay. You can’t have missed the flurry of media coverage earlier this month sparked by the recent Employment Appeal Tribunal decision in the case of Fulton v Bear Scotland. You will also have received our recent legal update on the case.

However we are sure you still have questions. In fact, both legally and practically, this ruling raises as many questions as it answers and many press reports on the case have lacked clarity and perspective. We attempt to address key concerns and clear up any confusion in our Question and Answer session below.

I know there have been holiday pay cases in the legal news before. Why is this one so important?

The Judgment very much follows on from previous European decisions which have said that pay supplements such as flight allowances must be included when calculating annual leave pay (Williams v British Airways)  and that the loss of the opportunity to earn commission during leave must also be reflected in holiday pay (Lock v British Gas).

However, this Judgment is particularly important because a UK appeal Tribunal is applying these European decisions and confirming that they can be used directly against UK employers. Calculation of holiday pay is an issue for every business, whatever its size or sector, hence the widespread coverage of this decision.

Does the judgment apply to voluntary overtime, or just overtime with a compulsory element?

The recent Judgment looked only at ‘non-guaranteed’ overtime (a type of overtime that an employer may choose to offer but the employee must work if offered). However, the basis of the ruling will inevitably be contended to also apply to voluntary overtime, if it is performed regularly or according to a discernable pattern. It will take another appeal level Judgment to clarify this point. We are happy to argue for you that it should apply to compulsory overtime only. However, if considering swapping from a compulsory to purely voluntary overtime system to avoid the impact of this decision, this may be only a short-term fix. Do take advice before you make any changes.

Will any other payments or allowances need to be included in holiday pay?

Any payments that are directly linked to the duties an employee performs under their contract and which are regular and settled enough to form part of ‘normal remuneration’ must be included in holiday pay. In this case, a payment for travelling time (as opposed to travelling expenses) was held to count. If you currently pay basic pay only during annual leave you should think carefully about any extra allowances or supplements you pay your employees and whether they might qualify as ‘normal remuneration’.

What about commission and bonuses?

The Lock European Judgment made clear that loss of the ability to earn commission must be factored into annual leave pay, in a case where the employee earned regular commission. What that means in practice will be determined: when the Lock case is reconsidered in the UK; by future cases; and in the light of your own commission arrangements and structure.  Bonus payment claims are also likely to follow and might succeed in some circumstances.  Take advice on your own practices, schemes and arrangements.

Does this judgment tell me how practically to calculate holiday pay?

Not really. Unfortunately this Judgment is not very helpful in telling you what you should do in practice and raises many significant complexities.

Before this decision there was some confusion about the appropriate ‘reference period’ for calculating average holiday pay. UK law states that a period of 12 weeks should be used, whilst some European case law had suggested that a longer period of 12 months might be more appropriate. This question is not explicitly answered in this decision, but the Judge decided that UK law is still ‘fit for purpose’ in light of recent European decisions (albeit with a few ‘tweaks’). This appears to endorse a reference period of 12 weeks.

If you currently use 12 weeks as the period for calculating ‘average’ holiday pay (or any other average payments) there is nothing in this Judgment to suggest you should change this.

I have heard in the media that employees can only claim three months holiday pay. Is this correct?

Not quite. Holiday pay claims are brought as claims for unlawful deductions from wages, which must be brought within three months of the last underpayment. But that doesn’t necessarily mean that employees can only claim three months’ holiday pay. If an employee has been underpaid within the last three months they may be able to show a ‘series of deductions’ stretching back some time. It’s the last of these deductions which must occur within three months of the claim (or ACAS being contacted). The Judgment does not answer the important question of how far back in time an employee could potentially claim.

However, the Judge in this case took an innovative new approach to working out how long a ‘series of deductions’ can be. He stated that a break of three months or more between any underpayments will break the series. The length of the series of deductions will therefore be different for each employee depending upon how and when they have taken their holidays.

This has been seen as a pragmatic attempt by the EAT to limit any detrimental impact of this decision on UK businesses. It is particularly effective at breaking the series if (as the Judgment suggests) only the first four weeks of each year’s annual leave is taken into account (the leave required by the European Directive) and not any subsequent leave taken under the more generous UK Regulations (an additional 1.6 weeks) or your own contractual scheme.  In most cases, this will break the series towards the end of each employee’s leave year.

If I require my employees to work overtime regularly, do I need to include that overtime in all the annual leave payments I make to my employees?

The obligation to include overtime in holiday pay appears from this Judgment to be subject to one significant limitation.  As the basis for the decision comes from European law, the obligation to include overtime in holiday pay appears to apply to the European minimum of four weeks leave only (usually 20 days) and not either the additional 1.6 weeks leave required by UK law (usually a further 8 days), or any additional contractual leave. This means that, in theory, you could pay an employee differently for their first four weeks of leave in each year than for any additional leave. However, obviously, this might be difficult to apply on a day to day basis, and might introduce additional administrative costs.

Is this the ‘final word’ on the holiday pay issue? Do we all know where we stand now?

The recent EAT decision was undoubtedly a landmark Judgment. However leave to appeal to the Court of Appeal has been granted and it is rumoured that an appeal is currently being prepared by the Union representing some of the employees involved.

That means this case will probably be re-argued next year and a further Judgment from a higher Court will be made (with the genuine possibility of a further appeal to the Supreme Court). Amongst other issues, the appeal is likely to look at the three month time limit imposed by the Judge in this case. It may also examine the distinction between compulsory and voluntary overtime in this context.

The Business Secretary has said he will be setting up a taskforce to consider the Judgment and possibly to limit its impact. How exactly this may be done, and whether it is possible, remains to be seen.

So, while this is certainly not the end of the story, it is still important for everyone to review practices and risk in the light of this decision.

I suspect there may be potential for employees to make claims against my business but I’m not sure about the extent of our potential liabilities. What should I do?

Many businesses are currently in the same position. Our advice is to start with a holiday pay audit – as soon as you can.

You will need to carefully analyse your workforce profile, pay structures and benefits. Time spent now could mean money saved going forward. Speak to your usual Weightmans contact for more information about our Holiday Pay Audit service. We can help you assess potential liabilities and work with you on strategies to implement change effectively or to minimise risk.

The pragmatic approach of the EAT to the time for bringing claims, has the unfortunate side-effect that there is a time pressure on employees (and their representatives) to submit claims and grievances quickly (and possibly to keep re-submitting them). Don’t be surprised if you receive contact from ACAS about holiday pay claims as part of the pre-claim early conciliation process.

This ruling may be expensive for my business. If I decide to include overtime payments in holiday pay going forward is there anything I can do to keep costs down?

If you wish, you could go as far as revisiting your entire reward structure to offset additional annual leave costs in other ways. For example, you could look at how and when overtime and bonuses are calculated, or when annual leave is taken to reduce your annual leave bill. Perhaps you could think about engaging agency workers to cover any particularly busy periods? Depending on the nature of your business and any peaks and troughs of work you experience there may be numerous creative ways of keeping costs down. However, do take legal advice before implementing changes to avoid any unforeseen consequences.

Further questions? If you have any concerns about how this judgment may impact your business we would be happy to talk them through or carry out a holiday pay audit for your business.  Speak to your usual Weightmans contact or get in touch with Phil Allen (phil.allen@weightmans.com).