Potential significant holiday pay liability for employers

6th October 2023

Potential significant holiday pay liability for employers

Following a series of decisions of the European Court of Justice (ECJ) on the calculation of holiday pay under EU law, in 2014 the UK Employment Appeal Tribunal (EAT) in Bear Scotland Ltd v Fulton Hertel (UK) Ltd v Woods Amec Group Ltd v Law, and the Court of Appeal in  Lock v British Gas Trading Limited, handed down decisions which fundamentally changed the way holiday pay should be calculated. Since then, four weeks of a worker’s holiday (that is the part of statutory holiday derived from the European Working Time Directive (WTD)) has had to be calculated based on normal remuneration, which must include:

  • Payments linked intrinsically to the performance of the tasks which the worker is required to carry out under their employment contract;
  • Payments which relate to the worker’s professional and personal status; and
  • An amount to reflect the contractual results-based commission a worker ordinarily receives.

The EAT introduced two types of case:

  • where there is a settled pattern of work – normal remuneration is pay which is normally received. Payment has to be made for a sufficient period of time to justify the label “normal”.
  • where there is no settled pattern of work – average remuneration should be calculated over an appropriate reference period, determined by national legislation (which following a subsequent amendment to the Employment Rights Act 1996 is now 52 weeks).

The EAT held that non-guaranteed overtime which the worker was obliged to work if requested to do so, was intrinsically or directly linked to the work, and needed to be factored in when calculating holiday pay. The position regarding voluntary overtime was less clear, but was subsequently clarified in another case, in which the EAT held that payments for voluntary work which is normally undertaken should also be factored into holiday pay.

For workers who have normal working hours, this “normal remuneration” approach has required employment tribunals to apply a different definition of a week’s pay in relation to the four weeks of annual leave under regulation 13 of the Working Time Regulations 1998 (WTR 1998), to that for the remaining 1.6 weeks of statutory leave.  The EAT’s decision didn’t affect the position as regards workers with no normal working hours, as employers were already required to calculate their holiday pay taking into account all elements of remuneration.

Prior to Bear Scotland, in HMRC v Stringer it was held that a worker could pursue a claim for holiday pay via an unlawful deduction from wages claim. Whilst claims under the WTR 1998 must be brought within three months of the date when the specific payment in question fell due, under the unlawful deduction provisions, claims can be made for a “series of deductions” provided that the claim is brought in an employment tribunal within three months of the last in that series. HMRC v Stringer therefore, opened up the possibility of a worker claiming back as far as 1 October 1998, when the WTR 1998 came into force. That risk was significantly mitigated by the EAT’s judgment in Bear Scotland because the EAT held that a three-month gap between deductions breaks the series. Furthermore, from 1 July 2015 a new statutory limit of two years on retrospective unlawful deduction from wages claims was introduced.

Because annual leave under regulation 13A of the WTR 1998 (the additional 1.6 weeks’ entitlement) may (for those with normal working hours) still be calculated in accordance with the Employment Rights Act 1996, i.e. based on basic pay only, this means that some payments of holiday pay would not represent an underpayment. It was arguable on this basis that, these “compliant” payments had the effect of breaking the series of deductions in every holiday year. Whether such an argument would succeed or not, the fact that a worker would have a period of holiday each year paid correctly, made it more likely that there was a gap of at least three months between periods of non-compliant payments. Whilst many employers quickly changed their practices to include overtime and various allowances when calculating holiday; because the law in this area remained relatively unsettled and susceptible to change, others have adopted a “wait and see” approach, often doing so in the comfort that any break in the series of deductions would significantly reduce any award of compensation.

Why are we telling you this now?

Well, that is because there has now been a significant development in this long-running saga that potentially increases the financial exposure for employers who have either deliberately continued to calculate holiday pay based on basic pay only or who have otherwise not calculated it correctly.

In Chief Constable of Northern Ireland v Agnew [2019] the Northern Ireland Court of Appeal held that a series of unlawful deductions from holiday pay would not be interrupted by gaps of more than three months and that a series could be constituted by deductions with a sufficient frequency of repetition, but occurring at different time intervals and in different amounts. Furthermore, “compliant” payments between the various unlawful holiday payments would not interrupt the series. Although the decision wasn’t binding in England and Wales, the case was appealed to the Supreme Court which has upheld the decision. That decision is binding on all courts and tribunals.

The ruling means that provided there is some common fault in underpayments, workers can now make claims for historic deductions going back two years, regardless of whether the deductions are more than three months apart or whether correct payments are made in between.

It is now imperative that employers that haven’t factored in normal pay, including overtime and commission, when calculating holiday pay, do so now. A worker must still bring a claim within three months of the last deduction in any series. By paying a worker correctly, an employer therefore effectively starts the clock running, so unless a worker submits a claim promptly thereafter, they may find themselves out of time and barred from doing so. Workers who are paid correctly may also feel less inclined to bring a claim in respect of earlier payments – well one can hope, anyway!

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