07 February 2014 #Employment
In view of some recent cases involving UK employers and interpretation of the EC Working Time Directive, particularly in the European Court of Justice (ECJ), employers may be significantly underpaying holiday pay. The Directive regulates not just working hours and holiday entitlement. It also regulates, according to the ECJ, the calculation of holiday pay, even though the Directive does not spell that out.
The concern is that, contrary to what employers have understood the legal position to be in the UK, even where employees have normal working hours, the calculation of holiday pay may have to include:
This is a worrying development – because of the back pay issue. The Supreme Court clarified in 2009(1) that, as a matter of UK law, statutory holiday pay can be claimed in an employment tribunal for periods going back for a long period of time as a “series of deductions” of pay. Every time holiday pay is made, any prior deduction is deemed to be repeated. So, if the same error in calculation is made again and again, that gets around the three month limitation period.
That means that if the UK government and courts have been making and applying EC law on holiday pay incorrectly i.e. contrary to the Working Time Directive, these arrears of holiday pay could go back a number of years, potentially going back over the whole of an employee’s employment.
If an organisation has underpaid holiday pay for its workforce for a number of years (the Working Time Regulations go back to 1998), the financial implications could be huge.
You cannot contract out of the WTR in respect of the calculation of statutory holiday pay. Note however that the above only applies to the basic 4 weeks holiday leave entitlement derived from the Working Time Directive. The further entitlement of 1.6 weeks annual leave is a requirement of UK law only.
The established legal position under UK law is as follows:
a) No normal working hours, piece work or where pay is dependent on shift patterns
It is established under the WTR that in these circumstances holiday pay is simply an average of all “weekly remuneration” earned over the previous 12 week period. That would include any overtime payments plus any commission.
b) Normal working hours
This is the more common scenario and where the problem lies. The WTR provide that only remuneration paid under the employment contract by reference to normal working hours counts towards the calculation of holiday pay. That would exclude any overtime, compulsory or voluntary, i.e. other than overtime guaranteed under the contract of employment (which is relatively rare). It may exclude commission as well unless it is paid according to the amount of work done.
“Intrinsic link” test
However, an ECJ judgment in 2011(2), now confirmed in an opinion of the Advocate General of the ECJ issued in December 2013(3), the ECJ focus on a much less strict test to ensure compliance with the Working Time Directive, of whether the remuneration in question is “linked intrinsically to the performance of tasks which a worker is contractually required to perform”.
On the basis of this test, it is likely that any form of overtime, commission or other regular payment related to work undertaken is likely to count towards the calculation of holiday pay – regardless it seems of whether there are normal contractual working hours or not.
As an indication of where UK employment tribunals are going, in a case last year an employment tribunal followed the approach of the ECJ, finding that the WTR do not give effect to the Working Time Directive. Controversially, it found in that case that holiday pay should include overtime payments, even though the employee had normal working hours of 35 per week(4).
The employment tribunal decision has been appealed (which may take some time to resolve) but on the basis of the ECJ decisions, prudent employers should take some action now. The full judgment of the ECJ in the Lock case will hopefully be out soon. It is expected that the Court will follow the Advocate General’s opinion.
The law on calculation of holiday pay has always been complicated and liable to trip employers up. Last year John Lewis was reported to have paid out £40m in holiday pay arrears as a result of a misunderstanding over the impact of shift patterns on holiday pay(5).
What should you do?
If you are sure that you already include overtime, commission and shift premia in the calculation of holiday pay over an average 12 week period, then you may not have too much to worry about.
If you do not include these sums or you are unsure, we recommend that you:
(1) HM Revenue & Customs v Stringer and others 2009
(2) Williams and others v British Airways plc (2011) IRLA 948
(3) Lock v British Gas Trading Ltd and others (2013) EuECJ C-539/12
(4) Neal v Frieghtliner Limited (2013)
(5) The Telegraph