Backdated holiday pay claims - cutting your margins?

26 September 2014


You've been underpaying your employees for four weeks every year since 1998. They're asking for the money back. How much is the bill? Can you afford it? A bad dream? No, a reality. This is happening.

The courts have said that any employee who receives commission and/or overtime should have that taken into account for their statutory holiday pay. The issue has already cost one retailer £40 million but the automotive sector is not immune. Trade unions are gearing up to back these sorts of claims and 'no-win, no-fee' lawyers are actively marketing for them.

What's all the fuss about?

Every worker has the statutory right to 5.6 weeks' holiday each year, paid at a rate of a week's pay for a week's leave. If an employee works set hours and is only paid a basic salary with no overtime or other elements of pay, the calculation of holiday pay is straightforward.

But if an employee's pay fluctuates depending on whether he or she is entitled to, for example, overtime or commission payments - familiar concepts in manufacturing facilities and dealerships respectively - things get more complicated.

This is why. In 2012 the Court of Justice of the European Union (CJEU) and subsequent Supreme Court judgments in British Airways plc v Williams established that a worker must be no worse off financially during annual leave than if he/she had continued working.

This means that workers are entitled to receive their normal remuneration when taking their statutory holiday leave. This includes not only basic salary, but also any other remuneration they receive that is "intrinsically linked to the performance of the tasks".

This decision led to other cases exploring the limits of this ruling. First in Neal v Freightliner Limited, the Birmingham Employment Tribunal decided that holiday pay must include non-guaranteed overtime, whether compulsory or voluntary, where, as in Mr Neal's case, it was worked regularly.

The Tribunal also ruled that a worker could potentially claim for several years of underpayments on the basis that each failure to pay proper holiday pay formed part of an unbroken series of unlawful deductions from wages. For long-serving workers this could go back as far as 1998 when the Working Time Regulations (WTR) first came in.

Similarly, in Fulton v Bear Scotland a Scottish Tribunal decided that a worker who regularly worked overtime as a matter of course was entitled to have that overtime reflected in his holiday pay and that standby and emergency call out duties should also be taken into account in the calculations.

Rounding off the hat-trick, came Wood and others v Hertel (UK) Ltd in which the Tribunal held that holiday pay should include overtime and productivity/performance bonus.

Appeals were lodged in all three of these cases. Unfortunately, Neal settled before the appeal hearing and so the Employment Appeals Tribunal (EAT) was not given the opportunity to clarify whether the Tribunal's approach was correct in that case. But Fulton and Wood were heard jointly this summer, together with another case from the construction sector. The judgment has not yet come out but it could be with us any day.

Adding to the uncertainty in this area is another case which has been to Europe and back and which is due to be heard on 21 October 2014. This is Lock v British Gas Trading Limited in which the CJEU ruled that EU law requires a worker's statutory holiday pay to take commission into account. The case has been returned to the Employment Tribunal for it to consider whether the UK's legislation can be interpreted in line with that CJEU decision and, if so, how much holiday pay Mr Lock was entitled to.

Where does this leave employers?

At the moment, employers should be assessing whether they are aware of their current potential liabilities if the tribunal decisions in Bear etc are upheld and what impact that would have on the company's financial situation.

Last summer it was widely reported that John Lewis paid out £40 million to compensate 69,000 workers after discovering that their holiday pay calculations did not take into account the double pay received by staff working on Sundays and Bank Holidays. That is £40 million of reserves which could have been ear-marked for an important initiative for the company which could not then be carried through. Or in a less robust business, it could have meant needing to take on unwanted debt to fund the liability.

In the automotive sector, the following pay practices could all be affected by these cases:

  • Manufacturing facilities where staff receive regular shift allowance;
  • Communications and PR staff who regularly attend weekend trade shows and receive additional payments for weekend working;
  • Dealerships and sales staff who work on commission - being away on holiday affects their ability to earn commission, having a knock-on effect on earnings later down the line potentially; and
  • Office based roles, like finance, where staff regularly work guaranteed or non-guaranteed overtime at month or year-end for example.

These are examples only and there could be other pay elements which need to be considered. Technically the CJEU's ruling in Lock would only apply to the four week entitlement under the European Working Time Directive itself, and not the additional 1.6 weeks which the UK introduced under the WTR or anything more generous agreed contractually. But in practice, trying to split out the 1.6 weeks and/or the enhanced contractual holiday from the four week entitlement may be more of an administrative burden than it is worth and simply add to costs.

So what is a week's pay for the purpose of calculating holiday pay? It is basic pay plus any additional payments which are intrinsically linked to the performance of the tasks but as can be seen from these cases, that is not the end of the story. The cases leave unclear key questions such as, for example, how often overtime needs to be done to be considered normal remuneration or what reference period should be used to work out what is normal.

The answers to these questions could make a material difference to cash-flow if staff need to be paid for overtime or allowances during a shutdown period, for example, thus materially increasing the wage bill in that month. We hope that the EAT's decision will give some clarity and not raise more questions than answers.

Action points

While we wait for the EAT judgment in Fulton and Wood and hear from the Tribunal when they reconsider Lock, employers should be using the time to assess the risk in their organisation, keeping an eye on legal developments and taking informed steps to mitigate any risk identified.

If you are not already looking at this, you may want to consider the following:

  • Carry out an audit of the different payments (e.g. commission, voluntary overtime, non-voluntary overtime, shift allowances and other premiums in pay) paid to workers in all parts of the business.
  • Review contracts of employment, contracts of engagement and staff handbooks to check that they accurately reflect how holiday pay is currently calculated.
  • Carry out an audit of your workforce demographic - this will help identify how long potential liabilities might go back for.
  • Remember paid holiday leave is important to staff. If you receive a grievance, deal with it appropriately and bear in mind that an individual grievance could easily escalate (as was the case with John Lewis) and in a large workforce with people piggy-backing on an initial successful grievance, lead to a significant cost.

While the data needed to scope the potential liability clearly sits within your payroll and HR records, you need to bear in mind that you may not like what you find. Once you've gathered the information, you will be fixed with the knowledge and it will be disclosable in any litigation.

A legally privileged risk assessment would seem sensible given the fact claims are being actively considered and pursued, as well as a joined up approach at Board level, with finance and HR working closely together.


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