DLA Piper – Holiday Pay Update

By devadmin
DLA Piper were running one of the holiday pay cases now on the news - below is a summary of the decision for your interest below as this may impact on many hospitality employers. With the decision just out, they are now assessing the likely exposure for employers and steps to mitigate risk/appropriate changes to ways of working. There is still plenty to think about, such as the treatment of commission and bonuses.
  • It matters - The Employment Appeal Tribunal (EAT) has today handed down judgment in the closely observed holiday pay appeals in Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others (DLA Piper acted for Bear Scotland)  It is one of those cases that matters.
  • Higher wage bills - The decision of the EAT will lead to marginally higher wage bills for many employers in the future. It's impact is likely to be more acute in businesses where paid overtime is already a significant cost.
  •  Look back is limited - the judgment significantly limits the potential for back pay liability.
The decision of the EAT is that many elements of pay which are currently excluded from the holiday pay of many workers must be included. But employees can only bring a claim within  3 months of an underpayment,  and in respect of any earlier underpayments only those in a series with no more than 3 months between them, which will limit historic liability.
The holiday pay claims arise because of an apparent conflict between UK and European law as to how holiday pay should be calculated and in particular whether elements of remuneration such as overtime and commission must be included. The Working Time Directive (Directive) entitles workers to 4 weeks' leave but does not specify how pay should be calculated. The Directive is implemented in the UK by the Working Time Regulations 1998 (WTR). Under the WTR workers are entitled to 5.6 weeks' leave and must be paid at the rate of a week's pay for a week's leave. The Employment Rights Act 1996 (ERA) sets out how to calculate a week's pay; the calculation depends on a number of factors including whether or not a worker has normal working hours.
The effect of the week's pay provisions is that many common elements of remuneration, such as overtime, commission and bonus are excluded from statutory holiday pay. However, in cases interpreting the Directive the Court of Justice of the European Union (CJEU) has consistently stressed the need for normal remuneration to be maintained during the period of annual leave.
The UK Holiday Pay Claims concerned whether other types of remuneration, mainly overtime and some travel payments, should also properly be considered normal remuneration and therefore be included in holiday pay.  There were three issues in contention in the EAT:
  1. Whether the elements of remuneration in question should be included in holiday pay;
  1. If so, whether UK law could be interpreted in order to give effect to that; and
  1. If there had been any underpayment of holiday pay, what constituted a 'series of deductions' from wages and in particular whether the series was broken by the employee taking the additional 1.6 weeks' holiday under the WTR.
In respect of the three issues, the EAT held as follows:
  1. Non-guaranteed overtime (that is, overtime which the employer does not have to offer, but the employee must work if offered) is part of normal remuneration and must be included in holiday pay, as must any other payments which form part of normal remuneration including shift allowances and comparable payments;
  1. It is possible to interpret UK law in such a way as to produce that result; but
  1. Payment for the additional 1.6 weeks' leave given by UK law but not the Directive will 'break' the series of deductions in any case where there is more than three months between the employee taking the additional leave and taking Directive leave.
What action should employers take now?
  • The immediate effect is that the 4 weeks' leave required by the Directive (Regulation 13 leave) and the additional 1.6 weeks' leave provided by the WTR ( Regulation 13A leave) are to be paid at different rates. This will cause some administrative headaches for employers and in the long run the Government may seek to remove the distinction between Regulation 13 and Regulation 13A leave; however, this is unlikely to be a legislative priority before the election. Employers will need to decide in the short term whether to pay the holiday at different rates or equalise up to pay all leave at normal remuneration.
  • Employers will need to consider precisely what needs to be included in the calculation of holiday pay ie what constitutes 'normal remuneration'.
  • Many employers will need to decide how to deal with existing claims. Unions have already filed a substantial number of claims for underpaid holiday pay, which have been stayed pending the outcome of the appeal cases. The decision of the EAT may provide an incentive to settle claims, as the potential for back pay is now limited.
  • In the longer term, employers will need to look at how they structure working arrangements in order to minimise the increased liability for holiday pay. Options might include offering voluntary overtime instead of non-guaranteed overtime, using bank or agency staff to cover periods of increased demand rather than offering permanent staff overtime, revising commission plans to schedule payments at a time which impacts less on Regulation 13 leave and preventing leave from being taken at certain times of year.
If you do have any queries or need assistance then DLA's market leading employment team is well-placed to help you on what will be a very significant area for businesses in the months and years to come.