UK: Implications of holiday pay judgement

In November 2014, a UK court ruled that non-guaranteed overtime should be taken into account when holiday pay is calculated. The Conservative–Liberal Democrat coalition government established a taskforce of business representatives to look at the issue. Trade unions have criticised legislative changes that were then introduced by the government to limit the impact of the ruling.

Implications of holiday pay judgment

The EU Working Time Directive entitles workers to four weeks' holiday pay a year but provides no details about how this should be calculated. Until recently, the government and most employers in the UK have interpreted the directive as meaning that holiday pay should be calculated using employees’ basic rate of pay, and that additional payments for regular overtime are not included. However, a recent ruling by the Employment Appeal Tribunal (EAT) suggests that the government and UK businesses have been interpreting the EU Directive incorrectly.

The ruling follows, and takes account of, a May 2014 judgment by the Court of Justice of the European Union (CJEU) in another British case, Lock v British Gas Trading Ltd, in which the CJEU held that holiday pay must be ‘determined in such a way as to correspond to the normal remuneration received by the worker’.

Key points of ruling

On 4 November 2014, in the case of Bear Scotland and others v Fulton and others, the EAT ruled that holiday pay should include non-guaranteed overtime. The EAT held that Article 7 of the Working Time Directive should be interpreted in such a way that payments for any overtime which the employees are required to work, even if their employer is not obliged to offer it, becomes part of normal remuneration and therefore should be included in the calculation of holiday pay under regulation 13 of the Working Time Regulations 1998.

The EAT ruled on three cases brought by the trade union Unite against the maintenance company Bear Scotland, the engineering company Amec and the industrial services firm Hertel. The staff at these firms had claimed that they consistently worked overtime, but that this was not included in holiday pay. As a result, they received considerably less pay when they took leave compared to when they were working.

Claims for unpaid holiday pay

The EAT ruling means that workers should have their non-guaranteed overtime taken into account when they are being paid for their annual leave. According to the Advisory, Conciliation and Arbitration Service (Acas), this judgment ‘may have an impact in situations where non-guaranteed overtime is carried out by workers on a regular or consistent basis. It is unlikely to have an impact in situations where non-guaranteed overtime is either already factored into holiday pay, or possibly where this overtime is only used on genuinely one-off occasions.’

Anybody making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an employment tribunal claim. If a claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between those underpayments.

According to Acas, the judgment applies only to the four weeks' annual leave entitlement under the Working Time Directive, rather than the full 5.6 weeks' leave provided by the UK Working Time Regulations.

Reactions from the social partners

The ruling was greeted with consternation by employers. John Cridland, Director-General of the Confederation of British Industry (CBI) said: ‘This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses. These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions. This judgment must be challenged. We need the UK government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.’

However, trade unions reacted positively to the EAT ruling. Frances O'Grady, General Secretary of the Trades Union Congress (TUC), said: ‘Failing to count overtime when calculating holiday pay is quite simply wrong. This ruling marks a victory for people who work long and hard to make a living, and who deserve to be properly paid when they take their well-earned leave. Scaremongering about the possible impact of this ruling is irresponsible. British business is far more robust than some of its spokespeople would admit. It's worth remembering that in 1999 a change in the law meant that six million people gained more holiday entitlements, and businesses easily absorbed the increase and employment continued to rise.’

As a result, the then Business Secretary Vince Cable said that the Conservative-Liberal Democrat coalition government would ‘review the judgment in detail as a matter of urgency’. He announced the establishment of a taskforce made up of representatives from business groups and government departments to assess the implications of the EAT ruling. The government had previously taken the view that overtime should not be included in holiday pay.

Make-up and remit of taskforce

The taskforce was chaired by the Department for Business, Innovation and Skills. Other relevant government departments also attended. No union representatives were involved. The business groups represented on the taskforce were:

  • the CBI
  • EEF, the manufacturers’ organisation
  • Federation of Small Businesses
  • Institute of Directors
  • British Chambers of Commerce
  • British Retail Consortium
  • Civil Engineering Contractors Association
  • GC100 - General Counsel and Company Secretaries working in FTSE 100 companies.

The aims of the taskforce were to assess the financial exposure employers face as a result of the EAT ruling and discuss how the impact on businesses could be limited.

Legislative changes

At the time of writing, no official announcement of the outcome of the taskforce’s deliberations has been made. However, on 18 December 2014, the government laid regulations before Parliament designed to protect businesses from ‘the potentially damaging impact of large backdated claims’. The Deduction from Wages (Limitation) Regulations 2014 (35.6KB PDF) amend the Employment Rights Act 1996 and the Working Time Regulations 1998 and provide that retrospective claims for unlawful deductions from wages, including any shortfall in holiday pay, cannot date back further than two years. The rules will apply to industrial tribunal claims made on or after 1 July 2015. While the government says it discussed the new regulations with the taskforce, they ‘do not represent a direct output of the taskforce’s work’.

Unions were strongly critical of the government’s move. The TUC commented:

[The government's] decision to limit all claims for unpaid wages to two years is a blatant attempt to water down [the EAT’s] ruling. At the moment, the law on back pay mirrors the rules on commercial debt, which can be pursued for six years in most of the UK. [The government’s] announcement smacks of treating workers as second class citizens, treating commercial debt more favourably than wages.

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