Holiday Pay: To pay or not to pay, this remains the question

The recent Employment Appeals Tribunal (EAT) decision in Bear Scotland v Fulton (Bear), further extended our understanding of what is to be included in holiday pay when an employee takes annual leave.

The Bear case followed on from a recent European Court of Justice (ECJ) decision of Lock v British Gas (Lock) where it was held that commission must be taken into account when calculating how much holiday pay a worker is entitled to.

Although the changes implemented by these recent decisions are unlikely to have a huge impact on the FE sector, FE colleges need to be alert that the way in which holiday pay is calculated has changed, and may continue to change. FE colleges need to be aware that they may have staff that will be directly affected by these rulings.

The previous position:

Under the UK Working Time Regulations 1998 (WTR) workers have a right to 5.6 weeks’ paid leave (including bank holidays) each holiday year and a worker must receive a week’s pay for a week’s holiday. A worker who has normal working hours will usually have their week’s pay calculated disregarding overtime payments with the exception of guaranteed overtime payments.

Under the European Working Time Directive (WTD) on the other hand, as interpreted by the ECJ, the focus of holiday pay is on normal remuneration. What exactly makes up “normal remuneration” has been hotly debated and according to the ECJ normal remuneration is pay that is “intrinsically linked” to the worker’s performance of their duties and is permanent enough to form part of the normal remuneration. In Lock the ECJ ruled that this was to include commission payments and Bear has now ruled that this also includes non-guaranteed overtime.

The Bear decision:

The EAT ruled in this case, that the UK WTR have to be interpreted to conform with the European WTD and that a worker’s holiday pay has to include non-guaranteed overtime (this is overtime that an employee is required to work but that the employee is not obliged to offer) and certain travel related allowances that were paid as taxable remuneration.

Payments for non-guaranteed overtime will be limited to the statutory four weeks holiday (including bank holidays) a worker is entitled to take under the WTD but this will not extend to the additional 1.6 weeks’ leave or any further contractual holiday entitlement a worker may be able to take.

Unfortunately, it is not clear yet whether the reference period of the last 12 working weeks which is currently used in the UK to calculate pay is held to conform with the WTD. Lock has now gone back to the Employment Tribunal to consider the level of holiday pay that Mr Lock is entitled to. This will include determining the appropriate reference period to use when calculating Mr Lock’s normal remuneration including commission. It will have to be seen what the Tribunal thinks the appropriate reference period is. However, the decision will not be binding and other Tribunals might decide differently based on the facts of the individual cases before them.

Backdated claims?

The Bear decision was widely publicised in the media. The media were quick to emphasise that the ruling meant that employers could face backdated holiday pay claims for unauthorised deduction of wages dating back to October 1998 when the WTD came into force. This was somewhat overstated.

The EAT addressed this issue and ruled that an unlawful deduction of wage claim, for underpaid holiday, cannot be brought as a “series of deductions” if more than 3 months has elapsed between one underpayment and the next.

The government has been quick to stamp out concerns by confirming that any backdated claim will be capped at two years; this provision comes into force on 1 July 2015.

Concerns

Most FE colleges will employ a majority of their staff on standard contracts. These contracts will require staff to work specified hours and have a proviso that staff will be required to work additional hours, where necessary, without an entitlement to additional pay. In these instances, FE colleges should not need to be concerned with the Bear decisions as non-guaranteed overtime should not be applicable.

However, there may be some instances, and I am thinking along the lines of canteen workers, site managers and administrative staff, where employee contracts will include payments for overtime. Colleges will need to be alert to these contracts and ensure that correct holiday payments are made when their staff take annual leave.

FE colleges will also need to understand and be prepared that, if they have underpaid staff in relation to their overtime, they may be subjected to backdated holiday pay claims.

Although overtime might not catch FE colleges out, FE colleges would be sensible to consider whether other payments will be caught (such as allowances and travel expenses).

Overall, the FE sector needs to be alert to the changes that Bear has introduced, but in practice it may only have a limited impact.

Sybille Steiner is a partner at Thomas Eggar, the law firm