Increased cost of shutdowns… the implications of the EAT's latest ruling for the automotive sector

10 November 2014

Our automotive specialists discuss the impact of the Employment Appeal Tribunal's (EAT) long-awaited ruling in the combined hat trick of cases - Bear Scotland Ltd v Fulton & others, Hertel (UK) Ltd v Woods & others and Amec Group Ltd v Law & others - and its implications for those in the automotive sector.

In our September alert "Backdated holiday pay claims" we explained how a series of complex holiday pay cases increased the holiday pay bill for employers and opened the floodgates for backdated holiday pay claims by workers.

This week the highly anticipated judgment of the Employment Appeal Tribunal (EAT) in Bear Scotland Ltd v Fulton & others, Hertel (UK) Ltd v Woods & others and Amec Group Ltd v Law & others confirmed what constitutes "normal remuneration" for holiday pay purposes. It also confirmed how far back a worker can claim if they have been underpaid.

The decision will impact on employers throughout the UK, but particularly those in the automotive industry where extra elements of remuneration such as over-time, shift allowance and commission are common.

So what's the latest position?

In short, the EAT has decided that:

  • Holiday pay must correspond to "normal remuneration" - this is what is normally received, including non-guaranteed overtime. However, this only applies in relation to the first four weeks of statutory leave.
  • There is limited scope for workers to recover historic underpayments of holiday pay by way of an unlawful deduction from wages claim.

This means employers will face larger holiday pay bills in future. Overtime, including non-guaranteed overtime, commission and other allowances forming part of a worker's normal pay must be included in holiday pay for the first four weeks at least. Employers can face claims for past underpayments, although the period for which a worker can back-claim is restricted by this judgment.

Given the significance of this decision, Business Secretary Vince Cable has announced that he is setting up a taskforce to assess the possible impact of the judgment.

Going forward, what must be included in the calculation of holiday pay?

For the purposes of regulation 16 Working Time Regulations 1998 (WTR), a "week's pay" is defined in accordance with the Employment Rights Act 1996 (ERA), under which only guaranteed overtime is included. However, following the Court of Justice of the European Union (CJEU) judgments in Williams v British Airways and Lock v British Gas, under the Directive workers are entitled to their "normal remuneration" when on holiday.

In light of the CJEU rulings, the EAT has held that overtime, including non-guaranteed overtime and other allowances "intrinsically linked to the performance of the tasks" must be included when calculating holiday pay.

This would include, for instance, shift allowances or overtime payments received by staff in vehicle manufacturing facilities and commission earned by sales staff at dealerships. This will inevitably lead to a considerable rise in holiday pay bills for many employers, which will affect overhead costs that haven't been factored in as part of the cost of production.

The EAT states that "normal pay is that which is normally received". In cases where the pattern of work is settled, it will be fairly easy to determine the normal pay. Where there is no such "normal", an average should be taken over a reference period. While not specifying a reference period, a 12-week reference period is likely to be considered appropriate to identify the average.

However, this only applies in relation to holiday pay payable in respect of the first four weeks of holiday entitlement, known as "Regulation 13 leave", and which derives from the EU Working Time Directive.

Regulation 13 v Regulation 13A leave - what difference does it make?

Under UK law, workers are entitled to 5.6 weeks' annual leave. However, it is only the first four weeks of leave under Regulation 13 that derives from the Directive. The additional 1.6 weeks under Regulation 13A is a matter of UK law only.

As the WTR must be interpreted so as to give effect to the requirements of the Directive, and the CJEU has given a wider definition to "normal pay" under the Directive, the UK courts are obliged to interpret the WTR accordingly, but only insofar as it relates to rights derived from the Directive. As Regulation 13A leave is not derived from the Directive, the wider interpretation of "normal pay" does not apply.

This means workers may be entitled to a higher rate of holiday pay for the first four weeks of annual leave and a lower rate for the remaining 1.6 weeks of statutory leave and any additional contractual holiday entitlement. This has an important impact in relation to potential back claims.

Back claims - how far back can a worker claim?

Under the WTR, a worker can only claim underpayments arising in the three months prior to the presentation of their claim. However, a claim for a series of deductions of wages under the ERA can lead to a very different result.

Last year in the case of Neal v Freightliner Limited, a tribunal found the worker was able to claim for underpayments going back to 2007 when his employment began. But does underpayment of holiday pay over a number of years constitute an unbroken "series of deductions of wages"?

Significantly, the EAT concluded that the workers in these cases could not claim any holiday underpayment as forming part of a series of deductions of wages where more than three months had elapsed between the "deductions", i.e. holiday taken but paid without factoring in overtime or other aspects of "normal remuneration".

The EAT states "any series punctuated from the next succeeding series by a gap of more than three months is one in respect of which the passage of time has extinguished the jurisdiction to consider a complaint that it was unpaid".

It may be that for manufacturers with production facilities, the practice of annual shutdowns could help. But shutdowns often don't take up the full annual holiday entitlement and, as ever, the devil is in the detail of the precise pattern of holiday and payment in any given case.

This part of the judgment is of great significance, limiting the number of years a worker may potentially look back. The chances of a worker having a long (if any) series of untaken Regulation 13 leave over a number of years is minimal under the EAT judgment. For now this provides some relief to employers as the value of backdated claims is reduced.

However, the decision may be appealed, as the EAT in its judgment has already given leave to appeal to both parties on any points which they lost. A successful appeal on how holiday pay should be calculated seems unlikely but based on the EAT judgment, the series of deductions point is harder to call. That is the point which impacts on the extent of historic liabilities for which most employers are unlikely to have made a reserve.

Action points

While we wait to see whether an appeal is lodged and for any subsequent Court of Appeal decision, which could take many months, the action points we flagged in our previous alert remain relevant.

Here are the action points that you may want to consider:

  • 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.
  • Reviewing 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 the workforce demographic and look at holiday patterns, including shutdowns - this will help identify how long potential liabilities might go back for.
  • Remember that 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 and in a large workforce, with people piggy-backing on an initial successful grievance, lead to a significant cost.
  • If you receive a claim for back payments seek legal advice. Remember, claims should be limited to four weeks' annual leave and checks made as to when holiday was in fact taken.

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