Beware a holiday pay Armageddon

Beware a holiday pay Armageddon

Firms with employees whose weekly pay varies through overtime and bonuses may face hugely increased holiday payouts. Paul Johnstone offers a legal expert’s explanation of the implications and suggests steps to take now

Concerns over possible losses of many jobs – with firms folding, even – through backdating of holiday pay have prompted construction and civil engineering industries in the North East to seek legal guidance over varying interpretations of EU and UK laws. Given that the laws apply potentially to any business, it’s an issue confronting every employer with staff whose weekly pay may vary, according to overtime worked and bonuses paid.

Fears of a “holiday pay Armageddon” are bringing detailed consideration of judges’ findings in the wake of the EU’s Working Time Directive and the UK’s Working Time Regulations, relatively “old” laws whose interpretation in case law decisions, both in UK employment tribunals and the European Court of Justice, has raised the problem.

The Working Time Directive – the European legislation – states statutory holiday pay is to be calculated using the ‘week’s pay’ provisions of the Employment Rights Act 1996. Some employers take this to mean periods of voluntary overtime and overtime payments should be disregarded when calculating pay to an employee about to take holiday.

But in the case of Williams and others v British Airways plc [2011] the European Court of Justice held that, under EU law, workers taking statutory holiday are entitled to receive their “normal remuneration”. This includes, besides basic salary, remuneration “intrinsically linked to the performance of the tasks” they must fulfil under their contracts.

So when calculating a worker’s dues in respect of statutory annual leave, it is important to look at what their normal weekly pay is under their contract of employment. For a worker on fixed hours and one basic pay rate, this is not difficult. Problems can arise, however, where an individual works differing shift patterns attracting differing rates of pay (e.g. overtime payments made on top of the ‘basic’ pay rate) or in cases where they earn commission.

The Williams case concerned an airline pilot who claimed contractual supplementary payments which she would have received had she been flying or staying away from home on business (if she weren’t on annual leave). As these payments were contractual, and the European court held they were intrinsically linked to the performance of the pilot’s contractual tasks, Ms Williams had the right to have those amounts included in her holiday pay. In a case since Williams, the Advocate General has given opinion in the Lock case which (while not legally binding) has indicated that commission payments should be taken into account as remuneration in respect of a worker’s annual leave – calculated to ensure workers are no worse off for taking holiday.

The case of Neal v Freightliner has addressed this issue in the context of overtime. The judge held that, in light of EU law, overtime should be included when calculating holiday pay under the Working Time Regulations, the UK legislation. This was so, even though the worker’s overtime was voluntary, because the judge noted that throughout the overtime periods the worker was still doing tasks he had to do under his contract. Accordingly, the worker’s overtime hours, pay and premia should have been included in his holiday pay calculation. Provisions of section 222 of Employment Rights Act 1996 may come into effect.

These require a calculation of “normal weekly pay” by using a 12 week reference period. Note: Use of this reference period would be consistent with calculating amounts of compensation in other scenarios – such as compensation payments in unfair dismissal cases.

Unlike the Williams decision, the Neal decision is not binding on other tribunals,
as it was a decision at first level, and an appeal was lodged on 20 August 2013. The Employment Appeal Tribunal was due to consider the Neal case on 10 April 2014.

There has been no decision domestically over how to apply the Williams case either. But
this is what the Neal case should do once the appeal is heard.

Paul Johnstone is employment partner Muckle LLP.

What to do meanwhile

Employers are in a state of limbo, with different businesses taking different interim action in response to developments. John Lewis pre-empted the Neal appeal’s outcome, on a basis of general indication being that holiday pay should include elements such as contractual commission and overtime pay. They backdated employees’ holiday payments accordingly.
However, for some this prospect is unattractive – potentially even financially impossible.
Maybe a deal can be reached whereby employers agree to an amended method of calculating holiday pay going forward, in exchange for the workers waiving their right to bring claims for “historical” unlawful deductions.

Employees can bring such claims in the employment tribunal, or may try to bring them in the county court as this could allow a longer time limit. (six years).

If the current decision in the Neal case is ratified, many employees of firms with hourly paid workers regularly on overtime or extra shifts for additional pay would be able to claim that, where the amount they receive on taking holiday does not accurately reflect that which they would receive while at work, they should be compensated. In many cases this could result in backdated claims which many companies will not be able to afford.

The result could be that some companies will effectively be insolvent. And, yes, some may go bust with many jobs lost.

Should employers lobby MPs? Absolutely, yes – those with hourly paid employees face a significant risk: that some cases could be going through the tribunal system, leading to a substantial liability materialising “out of the blue”, and giving employees an incentive to claim for significant sums in regard to backdated holiday pay.

Also there would be the potential liability for future payments of holiday pay. This could create difficulty for many companies in terms of cash flow, productivity, profitability and job security.