Employment Appeal Tribunal Holiday Pay Ruling

The Employment Appeal Tribunal Service ruled yesterday (November 4^th 2014) that when companies calculate employee holiday pay, this should now include additional payments which form part of an employee’s normal pay structure. There has been a lot of speculation as to what this might include and how this might affect businesses in the UK in the future; will this decision really be a triumph for employees or will it be a major factor in employees and businesses both losing?

Before we consider whether employees and businesses are winner or losers from this vitally important decision, we first need to understand what exactly was decided by the presiding Judge in this case and why such a decision was made.

The Case Hearing Overview

This case involved Bear Scotland vs Fulton Case along with two other cases to be considered within this case, Amec vs Law and Hertel vs Wood. The hearing was bought before the Employment Tribunal Service and was heard by the Honourable Mr Justice Langstaff at Fleetbank House, London, EC4 as employees believed that their voluntary overtime should be included within their holiday pay calculations.

Current Holiday Pay Calculations in the UK

Holiday entitlement was derived from EU Law “Working Time Directive 1993” which states that employees are entitled to a minimum of four-weeks per year holiday entitlement; however it did not stipulate or give details on how this should be calculated. As a result of this grey area, the UK Governments interpretation of this law which was implemented in 1998 under the “Working Time Regulations 1998” states that Holiday Pay should be calculated at the basic rate and this has created a grey area for those who work regular overtime, receive commission or regular bonus payments and those who receive variable pay.

Basic calculation

For a basic calculation of your leave allowance multiplies the number of days you work a week by 5.6. For example, if you work a five day week you would be entitled to 28 days’ annual leave a year.

• 5 days x 5.6 weeks = 28 days

Part Time Workers

If you’re a part-time worker, you’re still entitled to 5.6 x the number of days in your normal working week. For example, if you work two days a week you would be entitled to 11.2 days’ leave a year:

• 2 days x 5.6 weeks = 11.2 days

Casual or Irregular Working Patterns

If you work casually or irregular hours it may well be easiest to calculate the holiday entitlement that accrues (accumulates) as hours are worked. The holiday entitlement of 5.6 weeks is equivalent to 12.07 per cent of hours worked. The 12.07 per cent figure is 5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks – 5.6 weeks) multiplied by 100 = 12.07 per cent.

The 5.6 weeks have to be excluded from the calculation as you would not be present during the 5.6 weeks in order to accumulate annual leave. So if you had worked 10 hours, you would be entitled to 72.6 minutes paid holiday:

• 12.07 per cent x 10 hours = 1.21 hours = 72.6 minutes

Shift Workers

If you are a shift worker your leave is calculated by using an average of your shifts over a 12 week period. For example, if you always work four 12-hour shifts, followed by four days off (the ‘continental’ shift pattern) then the average working week is a three-and-a-half 12-hour shift. You would be entitled to 19.6 shifts of 12 hours as annual leave a year:

• 5.6 weeks x 3.5 shifts = 19.6 12 hour shifts

New Ruling Calculation

Under the Ruling of Mr Justice Langstaff held that Article 7 of the Working Time Directive is to be interpreted such that payments for overtime which the employees in two appeals before it were required to work, though which their employer was not obliged to offer as a minimum, is part of normal remuneration and to be included as such in the calculation of pay for holiday leave taken under regulation 13 of the Working Time Regulations 1998. Those Regulations could be interpreted so as to conform to that interpretation.

This results in that any employee whose pay includes regular overtime whether compulsory or voluntary, contains regular commission payments or contains regular bonus payments, all these should be included when calculating the employees Holiday Pay.

Retrospective Holiday Pay Claims

It was initially considered whether Mr Justice Langstaff would not allow retrospective claims for what is now considered as being “miscalculated holiday pay” or whether in fact employees would now be able to claim back from employers since the introduction of the Working Time Regulations in 1998.

Mr Justice Langstaff held that employees should be allowed to claim retrospective holiday pay claims from their employers but limited this to three-months.

What Will Happen Next?

It is highly unlikely that this will remain to be the end of the case. We know that this case will in fact be taken to the European Courts in Luxembourg for clarification on how EU Law should be interpreted, however on previous referrals the European Courts have also concluded that both commission and bonus payments should be included when calculating holiday pay. This at least allows us to understand the decision made by the Honourable Mr Justice Langstaff.

Both the office for Business, Invasion & Skills (BSI) and the Confederation of British Industry (CBI) have stated that this ruling must be fought and challenged.

The Ramifications of this Ruling

In order to understand the ramifications of this ruling we first need to understand just how many people this ruling may affect. Currently there are 30.8million people employed in the UK, of these 35% (10.78million-people)of full time workers do overtime and 27% (8.3million-people) of part time workers do overtime (Source: ONS). We can therefore see that just for those whom work regular overtime this is likely and potentially going to affect an incredible 19.096million workers of the UK.

So, we now understand how many potential workers, although minimally this ruling may affect. Now we need to look at the retrospective element which has been set by Mr Justice Langstaff at 3-months. This would result in UK Businesses possibly facing a preposterous number of claims ranging between 19.096million and 57.2million claims to administrate and settle or face potential legal action. Either way, this ruling is likely to cost UK Businesses £Millions in not just settling claims from employees but also in associated costs in administrating these claims.

Employees Winners or Losers?

So, with all things considered will the millions of employees working the UK be winners or losers in light of the ruling made by Mr Justice Langstaff at the Court of Employment Appeals Tribunal? Well, let us first consider some of the comments made by the professionals representing the UK Businesses:

CBI director-general John Cridland 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.”

Business Secretary Vince Cable said: “Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employer’s face, we have set up a task force of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”

Adam Marshall, executive director of policy and public affairs at the British Chambers of Commerce, said: “This ruling is damaging for businesses across the UK. Firms could be at risk of incurring significant financial losses, which could force them to close their doors altogether.

Managers across Britain are now in the difficult position of having to carry out more complex calculations for holiday pay, estimating overtime and commission rates of staff on holidays. This expanded definition of ‘pay’ is so ludicrous that the Government itself has argued against it. No business should have to pay more than base salary during holiday periods, unless they elect to do so.

What businesses fear most is that these judgments will open the door to backdated claims, which could run into the billions. Firms which have complied with existing regulations are shocked by the thought of having to back pay holiday entitlements – a change they could not have predicted. The pressure being placed on businesses by both the British tribunals and European courts on the issue of holiday pay is becoming unbearable. After the worst recession in living memory, with many companies working to reverse pay cuts and invest in their employees, giant new pay claims could be a huge blow to their growth prospects.”

CBI director general John Cridland 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,”

This is of course only one side of the opinions that has been raised, so in the name of fairness, now let’s look at what the opposing opinions were:

Unite executive director for legal services Howard Beckett said: “Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short-changed, but means employers have got to get their house in order. Employers will now have to include overtime in calculating holiday pay, and those that don’t should be under no illusion that Unite will fight to ensure that our members receive their full entitlement.”

Andrew Stones, employment partner at international law firm Squire Patton Boggs, who led the appeals on behalf of two of the employers in this case, said: “The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern amongst employers of the potential impact of historic holiday pay claims. Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today. Although opinions are mixed and we do not agree with some of the findings, we are pleased with the limits put in place on retroactive claims. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims. This finding will significantly limit the scope for such claims in the future and the flowing potential liability for companies.

While there are likely to be many businesses across the country, both big and small, that are still concerned about how this judgment could impact them and this is a very significant and positive finding for employers worried about retrospective liability. In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay.”

TUC general secretary Frances O’Grady 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.”

Unison general secretary Dave Prentis said: “The Government’s decision to set up a task force consisting entirely of employers’ organisations reeks of a whitewash before the first meeting. It is vital that any task force has the confidence of employees, so we are calling on the Business Secretary to put together a truly representative panel including trade unions.”

However, no matter what our personal thoughts are and let’s face it from the prospective of the Employers and Employer Representatives, they will always want to see minimal statutory payments and benefits for employee’s even though many will offer more than statutory requirements. Whereas from the prospective of the Employee and Employee Representatives, they will always want to see maximum statutory payments and benefits for employees.

I have absolutely no doubt that we can all think of some very good examples as to why this ruling should be upheld by the EU Courts and in deed why this ruling should not be upheld by the EU Courts. One thing is however very clear and this is how this ruling is likely affect every business in the UK and therefore hold potential negative and possibly devastating consequences for every employee in the UK.

You see, whether we agree or not with this ruling, the fact is that this ruling if upheld will have a number of effects on businesses and therefore employees through extension such as the cost of administrating immediate increases of holiday pay calculations which is likely to affect:

• The increase cost of holiday pay
• The decrease in overtime and overtime payments
• The increase in basic hours
• The decrease in commission payments
• The decrease in bonus payments
• The decrease in the number of staff being employed
• The increase in the number of businesses going in to administration

Now, I appreciate some may consider these points to be unrealistic or perhaps even scaremongering! However, if this ruling is upheld these are real dangers that both employers and employees face. So, from this landmark hearing and ruling, who are the winners in reality?