Last Tuesday’s Landmark Holiday Pay Decision…Is It Really A Disaster For Business?

November 11 , 2014
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  • Last Tuesday’s Landmark Holiday Pay Decision…Is It Really A Disaster For Business?
November 11 , 2014
November 11 , 2014

Last Tuesday’s Landmark Holiday Pay Decision…Is It Really A Disaster For Business?

November 11 , 2014
November 11 , 2014

Last Tuesday’s Landmark Holiday Pay Decision…Is It Really A Disaster For Business?

Last week the Employment Appeal Tribunal rocked the business world by ruling in the cases of Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others and Amec Group Ltd v Law and others (heard together) that non-guaranteed overtime needs to be factored into worker’s holiday pay calculations.

The national papers screamed out sensationalist clickbaiting headlines, which included words such as ‘time bomb’ and of course the dreaded reference to ‘job losses’.  One well-known tabloid excelled them all by dramatically announcing ‘Small firms could be hit for millions by Euro ruling: Workers could be entitled to backdated holiday pay if landmark case goes in their favour’ hours before the final decision was conveyed by the Tribunal.

My aim with this article is to bring a sense of perspective and calm to this recent development concerning employment law by explaining the actual decision itself, why the Honourable Mr Justice Langstaff interpreted the European Union Directive and the relevant domestic legislation the way he did, and what it means for your business, both now and in the future.

Why is Overtime in Relation to Holiday Pay Calculations Suddenly a Hot Issue?

Prior to last Tuesday’s decision only basic pay counted when calculating holiday pay in most industries. Nice and easy, for both employers and payroll staff.

The decision in Bear Scotland turned on the interpretation of Article 7 of the European Union Working Time Directive which was implemented into British law by Regulation 16 of the Working Time Regulations (1998).

Article 7 of the Working Time Directive reads as follows:

“Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions of entitlement to, and granting of such leave laid down by national legislation and/or practice.

2) The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.”

Regulation 16 of the Working Time Regulations provides:

“(1) A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under Regulation 13, at the rate of a week’s pay in respect of each week of leave.

(2) Sections 221 – 224 of the [Employment Rights Act 1996] shall apply for the purpose of determining the amount of a week’s pay for the purposes of this regulation…”

In simple terms, Article 7 and Regulation 16 taken together have been interpreted to mean that all workers must be entitled to annual leave, and the amount that they are paid during their annual leave must be the same as they would normally receive if they were working. It is then up to the government in the United Kingdom to determine how the payment of annual leave is to be calculated.

In the case before the Employment Appeals Tribunal last Tuesday, Langstaff J was required to determine if non-guaranteed overtime (overtime which the employer was not required to provide, but under their employment contract, an employee was obliged to perform) should be factored into holiday pay calculations in order to ensure that the remuneration an employee received whilst on annual leave was of a comparable amount to what they received when they were actually at work. Many employees who rely on regular overtime payments to increase their weekly take home pay have been at times reluctant to take annual leave because they receive significantly less money in the time that they are on holiday than they do when they are toiling on the job.

Some Background to the Bear Scotland Decision

To understand the reasoning behind the Bear Scotland decision, one must refer to the 2011 case of British Airways plc v Williams.  The claimants, who were airline pilots, argued that all elements of their remuneration, the base salary, a variable supplementary payment for time spent flying and an ‘away from home’ allowance should be calculated into their holiday pay under the Civil Aviation (Working Time) Regulations 2004 (which implement Council Directive 2000/79/EC, relating to mobile staff in civil aviation, which includes the same provisions on annual leave as does Working Time Regulations).  The case reached the Supreme Court who referred the following question to the Court of Justice of the European Union (CJEU):

‘To what extent, if any, European law defined or laid down any requirements as to the nature and level of payments required to be made in respect of paid annual leave and to what if any extent Member States might determine how such payments were to be calculated’.

The CJEU concluded the following:

  • The Court had previously stated in Robinson-Steele v R D Retail Services Ltd and Stringer v Revenue and Customs Commissioners…that employees must receive their normal remuneration when on annual leave.
  • Therefore a payment which just sufficient enough to ensure that the employee will take his or her leave will not be adequate to satisfy European Union Law.
  • If a worker’s remuneration is composed of several elements (as the pilots’ was), then each element of the remuneration must be analysed separately to determine what constitutes normal remuneration.
  • It is therefore up to the national courts to conduct this analysis of the employees’ duties and the various components of their remuneration over an acceptable reference period to decide what components of the remuneration need to be taken into account when calculating annual leave payments.

In this case, the CJEU held that the supplement for time spent flying should be included in the annual leave calculations because flying was an intrinsic part of a pilot’s job, however, the  ‘away from home’ allowance which was paid occasionally did not need to be factored in.

Following on from this judgment the Supreme Court reinstated the Employment Tribunal and Employment Appeal Tribunal’s original rulings which had found in favour of the claimant.

The reason I have gone into so much detail about this case is to illustrate that the Employment Appeal Tribunal did not recklessly make a random, arbitrary decision designed to send Britain’s SME owners rocketing towards the poorhouse on Tuesday, rather it simply had to decide whether the precedent set by British Airways plc v Williams should be applied to cases concerning Regulation 16 of the Working Time Regulations (or non-aviation situations).

Langstaff J, concluded that they did, and held that “Article 7 requires and required non-guaranteed overtime to be paid during annual leave”.

It was also ruled that claimants could make claims for the back pay of what is now (after the ruling) unpaid annual leave, however, the Tribunal ruled that payments can only be backdated for three months.

The Immediate Impact of the Ruling

The Coalition Government has set up a taskforce which includes many of the United Kingdom’s main business lobby groups to examine the impact the decision will have on business.

There are many uncertainties surrounding the decision such as:

  • Whether ‘normal’ pay includes voluntary overtime
  • How the decision will apply to different industries and overtime payment methods
  •  Can employees argue breach of contract to circumvent the three month limitation period for backdated payments?
  • Are there any other variable elements of an employee’s remuneration package which should be taken into account when calculating holiday pay?

The best strategy at the present time is to have a discussion with your solicitor if you are concerned about your current obligations.

The Future?

This decision has been left open to appeal, and given the implications of the judgment it is highly likely that a superior Court will be asked to make a ruling.

The Government also has the power to rush through emergency legislation as it did with the Data Retention and Investigation Powers Act 2014in order to close any loopholes regarding backdated claims.

As it stands now, the test cases are likely to remain in the Court system for a good year or two.  In a few months the Tribunal will rule on whether earned commissions should be taken into account when calculating holiday pay.  Although these rulings may change the relationship between an employer and an employee, they are unlikely to bring about the collapse of modern business, as is being suggested by some of the nation’s media outlets.

Watch this space, we promise to keep you up to date on any new developments.

To find out more about your holiday pay obligations please click here.

If you would like to comment on this new development in employment law then please feel free to add your thoughts below.


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