Holiday pay: A time bomb waiting to happen? - DAC Beachcroft

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Holiday pay: A time bomb waiting to happen?

Published On: 2 September 2014

There has been recent press coverage about trade unions gearing up to bring claims for owed holiday pay, and the potential liabilities for employers running into the millions.

Holiday pay entitlement

By way of background, under the Working Time Regulations 1998, a worker must receive a week's pay for a week's holiday. The difficulty is that the definition of a week's pay differs depending on the circumstances. If the worker has no normal working hours, a week's pay is based on a 12-week average taking account of all remuneration including bonuses, overtime, commission etc. In the majority of cases, where the worker has normal working hours (e.g. a 35 hour week), a week's pay is based on what the employee would get for working those hours. Bonuses and overtime would be excluded, and variable elements such as commission are only included if it can be said that pay varies with the amount of work done or the time at which it is done, rather than with the success or otherwise of that work.

Recent case law

In 2013, an employment tribunal decision in the case of Neal v Freightliner decided that, irrespective of the worker having normal working hours, his overtime pay should be included in the calculation of holiday pay where it is "intrinsically linked to performance of the worker's contractual duties". In another case (Wood and others v Hertel (UK) Ltd and another) the tribunal had held that "compulsory" overtime (where the worker must work overtime if required to do so by the employer) must be included in the holiday pay calculation.

In Freightliner the tribunal applied the same principle to voluntary overtime (overtime that the worker may accept if offered but is not obliged to). As a result, the potential cost implications for employers is significant, not just for holiday pay going forward, but also for the liability of potential past underpayments.

The Freightliner case was appealed to the Employment Appeal Tribunal, but settled at the end of July before it was due to be heard. However it was conjoined with cases with similar facts (Bear Scotland Ltd v Fulton and another, Hertel (UK) Ltd v Wood and others, Amec Group Ltd v Law) and that appeal did go ahead on 30 July to 1 August 2014. We are still awaiting the judgment in this case – we understand it is likely to be handed down in October 2014.

Since this case the European Court of Justice has ruled (in the case of Lock v British Gas Trading) that holiday pay under the Working Time Directive cannot be calculated based on basic salary alone where a worker's pay includes commission determined with reference to sales achieved. If commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave, since no commission will be generated during their holiday period. In such circumstances, the worker might be deterred from exercising the right to annual leave, which would be contrary to the Working Time Directive's purpose. There is therefore a possibility that overtime will be treated in the same way. Following the ECJ's decision, the Lock case has now been sent back to the tribunal and is due to be heard on 20 and 21 October 2014.

The threat

In the meantime, employers should be aware that there are specific firms reported to be focussing on the construction sector, and contacting unions and workers about possible multiple claims for holiday pay. We have already seen correspondence from various trade unions to employers querying how they are calculating holiday pay and implying claims for unlawful deductions from wages will be pursued. Specific construction sector unions, such as UCATT, have publicly welcomed the decisions in cases such as Freightliner

The liability

Claims for unlawful deductions from wages must be brought in a tribunal within three months of the last time an underpayment was made, or when the last underpayment in a series of deductions was made.

The key risk is that there may be accrued liabilities going as far back as 1998 when the Working Time Regulations were introduced, and identifying and calculating potential liabilities may be difficult given the passage of time and availability of pay roll records. To complicate matters a little further, the Working Time Directive provides workers with only a 4 week entitlement, however the Working Time Regulations (as implemented in the UK) provide for workers to be entitled to 5.6 weeks holiday. The Courts and tribunals have suggested that these rules will only apply to the 4 week entitlement under the Directive, leaving employers with the potential headache of trying to strip out 1.6 weeks from any liability calculations, and potential future payments.

Next steps

Some employers may have already brokered specific pay deals with workers/trade unions to cover off this risk, whilst others are waiting to see the outcome of the appeal. In the meantime, it is expected that claims for unpaid holiday pay will start making their way through the tribunal system. Employers therefore need to start to consider their strategy for handling these issues, including making provisions in accounts for accrued unpaid holiday pay, and costing out potential future holiday pay costs too.

We have significant experience as a team of advising on and defending claims concerning this issue, and working with employers to produce legally privileged audits of pay issues and strategic plans – please get in touch with Louise Bloomfield if you would benefit from a confidential discussion about what can be done about this threat.