It's a trap!

Employment Law Newsletter - Special Edition


Holiday pay - time to get the wallet out?

Given that the broadsheets, the radio airwaves and the TV screens have been publicising it, you will almost certainly already be aware of the judgment of the Employment Appeal Tribunal (EAT), in a set of conjoined appeals headed by the case of Bear Scotland v Fulton, on the calculation of holiday pay. But it would be remiss of us not to join in the clamour about a ruling of such notoriety. So, in one of our relatively rare publications between the normal, ten periodical newsletters, let's try to break down what the EAT in Fulton did decide, what it did not and what happens next.

The European Court of Justice (ECJ) had already decided (Williams v British Airways, Lock v British Gas) that payments other than basic salary/wages should, if 'intrinsically linked' to the performance of contractually required duties and so part of 'normal pay', count in the computation of holiday pay under the Working Time Directive (WTD).

The EAT's job in Fulton was to define how this applied to the Working Time Regulations (WTR). The principal question for determination was whether the WTR, without Parliamentary amendment and contrary to their most obvious meaning, could have words 'read in' so as to give effect to the ECJ's rulings and require certain non-basic payments to employees (centrally, overtime) to be included in the calculation of a day's or week's pay for the purposes of paid holiday.

The EAT's answer in Fulton was 'yes'.

That is a, even the, key point. The doctrine of judicial precedent works on the fiction that this position was always the case, so creating the prospect of claims for back pay that have been causing employers concern. More about that later. (By contrast, if the EAT had not believed it possible judicially to stretch the words of the WTR, the changes necessary to become compliant with the ECJ's interpretation of the WTD would have needed Parliamentary approval - and Parliamentary amendments to the law do not have retrospective effect.)

Now, on to some of the detail.

Payments for which types of overtime are covered by the Fulton ruling?

According to the EAT, pay for recently worked 'non-guaranteed overtime' (NGO), which featured in two of the three cases under appeal, should be included in the calculation of a worker's holiday pay. NGO is something that, under the contract, an employer is not obliged to offer or make available but which the employee must work when 'required' to do so. ('Guaranteed overtime' does not really need considering - if the employer is obliged to make a certain amount available or, at least, pay for it each week, it is part of normal pay under current UK legislation anyway.)

Truly 'voluntary' overtime, where it may be offered to but can be refused by the employee, was not considered by the EAT in Fulton. It might not be seen as sufficiently 'intrinsic' to the performance of what is 'contractually required', but that is not an assured position yet.

What other types of payments are, or could be, covered by the principle used in Fulton?

The employment tribunal in one of the Fulton cases found that a payment encompassing both fixed productivity allowance and performance-based sums was part of normal pay. That finding was not challenged or questioned at all when the case went to the EAT.

Apart from overtime, the only other forms featured in the cases considered on appeal were a radius allowance (RA) and a travelling time payment (TTP).

The RA was payable to a worker travelling daily from home to work all day at a site more than a certain distance away. It related to a combination of travelling time and cost. Part of it was treated by HMRC as taxable remuneration.

The TTP gave employees, for a one-way journey, one hour's basic pay for the first 30 miles travelled for work and half an hour's basic pay for each subsequent 20 miles.

The taxable part of the RA and the whole of the TTP were found by the EAT to be directly linked to normal working responsibilities, so the historic amounts went into the calculation of holiday pay.

Before moving on, we should remind you that, although not at issue in the Fulton appeals, commission derived from an individual's sales activity (and frequently comprising a substantial element of earnings) is, according to the ECJ in the Lock case, part of his or her 'normal pay' when calculating holiday pay. From that, it could be readily inferred that many forms of bonus would be treated similarly.

In summary, it seems that anything received only when doing or preparing or being available (call out, stand by allowances?) for required duties is quite susceptible to being treated as part of normal pay in this context. The only clear exclusions at this point are those payments wholly concerned with reimbursing a worker for out of pocket expenditure.

What is the reference period for averaging or levelling out the weekly or daily value of these non-basic payments?

The EAT did not go near this question or, more importantly, suggesting an answer. In part, this could be because there is not a 'one size fits all' period. Also, the previous ECJ rulings under the WTD made it clear it was for member states to specify this in legislation or through agreements. And, although Parliamentary intervention is not necessary to make past overtime pay part of the holiday pay calculation, it is almost inevitable that this important detail will be resolved by this route - indeed, as soon as the EAT's ruling in Fulton was issued, the Government announced the establishment of a task force to consider (= mitigate) its effects.

Probably the most that can be proffered at this stage is that, for payments capable of being reasonably frequent (weekly or monthly), a reference period of 12 weeks - as used by the statutory rules for calculating a week's pay when there are no normal working hours - or perhaps 17 weeks - as used for other aspects of the WTR - would be sensible.

However, if annual or six-monthly bonuses are ultimately found to be intrinsically linked to required duties and treated as normal pay, their inclusion in the calculations for paid holiday would demand a longer reference period.

To pay for which days of holiday does the Fulton ruling apply?

In simple terms, the requirement to include overtime earnings in paid holiday applies only to the core 20 days/4 weeks prescribed by the WTD and by the original WTR ('Regulation 13 holidays'). Neither the extra 8 days/1.6 weeks now given by the WTR ('Regulation 13A holidays') - to which the more restrictive current rules on a 'week's pay' will continue to apply - nor any extra leave days granted by contract are affected.

The way in which these 20 days are identified or distinguished from others has importance (see below).

How far back can an employer's liability under Fulton go?

Although the EAT did not opine directly on this subject, there does not, unless and until the Government chooses to intervene with a new legislative control (a measure that, by convention at least, could not benefit employers retrospectively), seem to be any great obstacle of principle to liability extending back to either 1998 (when the WTR took effect) or a worker's start date, whichever is the later.

But, if the EAT's ruling survives (see 'Where do things go from here?' below), the real impact here should be greatly reduced in the case of many employees/workers. The reasoning is tricky, but here goes.

Obviously (this is the easy bit), any individual will have received holiday pay on the old, pre-Fulton, 'basic only' basis in chunks, split by periods of working activity.
A claim about the underpayment of WTR holidays is brought as one for an 'unlawful deduction of wages' under the Employment Rights Act. The rule there is that where there has been a series of similar deductions over a period of time, the claim must be brought within three months of the last deduction in the series.
The EAT in Fulton ruled that a gap of more than three months between any two successive holiday underpayments would 'break the chain', rendering at least the earlier incident and any predecessors 'out of time'.
The EAT then returned to the distinction between Regulation 13 leave and Regulation 13A leave, with only the former being susceptible to the inclusion of overtime earnings (see above).
It added the important points that:
The WTR give employers significant control over when Regulation 13 leave is taken; and
Since Regulation 13A leave is described by the WTR as 'additional', it is logical that it is the last to be taken in any given holiday year.
The effect is that, in most cases, past compliant/lawful payments for the last 8 days/1.6 weeks of annual leave (treated as under Regulation 13A, where only basic pay is required) will have created gaps of more than three months between incidents of non-compliant/unlawful underpayments for the first 20 days'/4 weeks' leave in the year (the Regulation 13 days, where overtime should have been included).

So, in summary, under the EAT's ruling, it is quite possible that most individuals will be unable to run a claim extending back to anywhere near the beginning of employment or 1998 - because their personal 'chain' will have been broken no more than a year back due to holidays of 'the right type' (Regulation 13 days) occurring with insufficient frequency.

Of course, every silver lining has a bit of cloud attached. To ensure that this 'benefit' accrues, an employer must go through its records for each worker.

Does the Fulton principle apply to those who have left?

Well, they are not explicitly excluded. Nevertheless, most will be unlikely to have a viable claim because of the three month limitation period just mentioned.

If they left more than three months' ago or departed more recently but it is more than three months since any holiday payment, it seems any claim for underpayment would be out of time.

Where do things go from here?

The legal forum

In the immediate sense, to the Court of Appeal (CA) - the EAT, while stating that it considers only its finding about the break in the chain (and the important effect on claiming back pay - see above) to be arguable, has given both sides leave to appeal all aspects of its ruling. And, subject to the outcome there, on to the Supreme Court (SC) and/or to Parliament for implementation of the work of the Government's task force.

Meanwhile, both in respect of back pay and to force the issue going forward, some of you will start to receive claims from the employment tribunal, whether in grouped multiples, almost always represented by a trade union, or from single workers. In either case, you will get advanced warning - if you have not already - through the mandatory early conciliation procedure. If and when you receive a notice of claim, read carefully what it says. It is quite likely that you will not be required to submit a response, or at least anything more than a holding response, pending the unravelling of the legal cat's cradle in the CA or SC. But, if you have any doubts or questions about what you must do, please do contact us.

In reality, with the uncertainties currently generated by the inevitable appeals to the CA and the questions left unanswered by the EAT, neither litigation nor negotiation can sensibly proceed. You might think it a good idea to settle historic claims on the basis of the restricted liability approach described above, but claimants, especially when represented by unions and/or lawyers, are likely to want to hedge their bets pending clarification on appeal.

Things could be in relative limbo for a year or two yet (our earlier use of the word 'immediate' has to be seen in the slow context of legal process). But that should not stop your checking what records you have (remember, to be useful, they need to separate and specify holiday pay and NGO - also, if possible, performance/productivity payments, commission et cetera for each employee) and then estimating possible liability. Contact us if you would like a hand.

Managing on the ground

In one respect, the continuing legal uncertainty works to your advantage. It is quite legitimate to respond to employees' assertions or enquiries about changing the calculation of their holiday pay by saying that, pending appeals and the outcome of the deliberations of the Government's task force, payment will continue on the same basis.

Of course, precautionary measures are sensible in the meantime. So, for holidays going forward and keeping the focus for now on overtime (that is the subject of the furore currently caused by Fulton and it's probably quite enough to be going on with), some steps for consideration are:

Examining more detailed, controlled ways of managing the taking of holidays;
Identifying and specifying in authorisations whether leave is under Regulation 13 or Regulation 13A;
Accruing funds for liability for increased holiday pay once the dust has settled;
Controlling the use of overtime, whether through improved performance management (perhaps including some financial incentive of a less regular nature) or, even, the use of agency labour; and
Looking to reduce overtime rates (naturally, through a lawful process that does not entail a breach of contract or risk a finding of unfair dismissal).

If you would like to discuss this or any other issue facing your organisation please speak to your usual contact at Collinson Grant or Jo Hale on 0161 703 5600

Although care has been taken in the preparation of this Newsletter, Collinson Grant cannot accept responsibility for errors, omissions or advice given. Readers should note that only Acts of Parliament and Statutory Instruments have the force of law and only the courts can authoritatively interpret the law.