In Williams and others v British Airways plc (Case C-155/10) the ECJ held that pilots’ holiday pay entitlement under the Aviation Directive (2000/79/EC) should not be limited to basic salary but instead correspond to “normal remuneration”. That meant that pilots should be entitled to holiday pay in respect of:
- Remuneration that is linked intrinsically to the performance of tasks which form part of their contracted employment.
- Payments that relate to their professional or personal status including payments relating to their seniority, length of service or applicable professional qualifications.
Whilst Williams concerned the Aviation Directive and not the Working Time Directive, the ECJ ruled that the same principles applied in each case.
In the subsequent case of Lock v British Gas Trading Ltd (Case C-539/12) the ECJ considered the earlier decision in Williams specifically in relation to the Working Time Directive. In that case, they held that holiday pay under the Working Time Directive cannot be calculated based on basic salary alone, where a worker’s remuneration included commission determined with reference to sales achieved.
The basis of this decision was that if commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave, as during that period no commission will be generated. As such the worker might well be deterred from exercising the right to annual leave which was entirely contrary to the purpose of the Directive.
This case opened up a flood of questions regarding the impact of the Working Time Regulations 1998 (SI 1998/1833) (WTR 1998) and the approach the calculation of holiday pay. Prior to the case, the WTR used the formula of “a week’s pay” taken from the Employment Rights Act 1996 (ERA 1996). This led to a raft of cases in employment tribunals in which workers sought to challenge their employers’ calculation of holiday pay which had been based only on basic pay. Instead they sought to include elements such as commission, overtime pay, attendance bonuses and travel allowances.
The matter was then considered by the EAT in the conjoined appeals of Bear Scotland Ltd v Fulton and another UKEATS/0047/13, Hertel (UK) Ltd v Woods and others UKEAT/0160/14 and AMEC Group Ltd v Law and others UKEAT/0161/14, which related specifically to non-guaranteed overtime and various travel allowances
The impact of Williams and Lock
Under the WTR 1998 a worker must receive a week’s pay for each week of holiday taken. This is concept of a “week’s pay” as set out in sections 221 to 224 of the ERA 1996. The difficulty is that the definition of a week’s pay differs depending on the employees circumstances:
- No normal working hours. If the worker has no normal working hours, a week’s pay is calculated according to section 224 as an average of all remuneration earned in the previous 12 working weeks; including bonuses, overtime, commission etc
- Normal working hours. Generally, a worker who has “normal working hours” will have their week’s pay calculated with reference to those normal hours. This usually means basic salary, disregarding any non-compulsory overtime hours and without any additional bonuses, commission payments or allowances (sections 221 to 222 and 223(3), ERA 1996).If the employee’s pay varies, say due to work done or hours worked then a week’s pay is calculated using the employee’s average remuneration over the previous 12 working weeks from the date of reference.
The Employment Appeals Tribunal decision in Bear Scotland
The EAT considered how overtime and certain travel allowances should be treated for the calculation of statutory holiday pay provided for by the Working Time Directive. It held that:
- Article 7 of the Working Time Directive requires pay which is “normally received” to be paid during periods of holiday. Payment has to be made for a sufficient period of time for it to qualify as “normal”.
Where there is a settled pattern of work, it is easy to identify such normal remuneration. Where there is no settled pattern, it is appropriate to use an average taken over a reference period determined by national legislation.
- There must be an intrinsic link between the payment claimed and the work a worker is required to carry out.
Where overtime is required of an employee, it would be perverse to hold that the resulting overtime pay was not intrinsically linked to the work. Therefore, Article 7 includes non-guaranteed overtime, where the employer is not obliged to provide the overtime, but the worker is obliged to work it. The position regarding voluntary overtime is less clear.
The WTR 1998 should therefore be interpreted to conform with Article 7 of the Working Time Directive.
The “normal remuneration” approach set out above has now therefore displaced the ERA 1996 definition of a “week’s pay” for the purposes of calculating statutory holiday pay under the Working Time Directive.
It is however important to note that when we refer to Working Time Directive rather than Regulation holiday, it is the four weeks of annual leave under regulation 13 of the WTR 1998, not the remaining 1.6 weeks under UK legislation to which we are referring.
Implications for calculating holiday pay
What should now be included in holiday pay under the Working Time Directive?
Following the EAT’s ruling in Bear Scotland, the statutory holiday pay derived from the Working Time Directive (i.e. the first 4 weeks) must be calculated in accordance with the tests laid down in the ECJ case law, whereby holiday pay is based on “pay that is normally received” and must include:
- Payments linked intrinsically to the performance of the tasks which the worker is required to carry out under their contract of employment.
- Payments which relate to the worker’s professional or personal status.
What Does This Mean Should Now Be Included?
Commission?
Yes, currently commission must be included as it was intrinsically linked to the performance of tasks under the worker’s contract. While the calculation is left up to national courts to determine under national law, it must be based on average commission earned “over a reference period which is considered to be representative”
Lock was appealed to the EAT in December 2015, in the case, British Gas argued :
- Bear Scotland was wrongly decided, and that the words read into the legislation by the EAT had amounted to “judicial vandalism”, giving the WTR 1998 provisions a meaning that went against the grain of the legislation.
- Commission and non-guaranteed overtime are dealt with under different provisions of the WTR 1998, which use different language, and that it had been wrong to conclude that Bear Scotland was relevant to the outcome of Lock.
Judgment, at the time of writing (January 2016), is awaited and may alter the current position.
Overtime pay?
As mentioned above, there are 3 accepted types of overtime:
Guaranteed/Compulsory Overtime; where even if the employee is not called on to work it, the employer is liable to pay them for it.
Voluntary Overtime; where an employee cannot be required to work it, and the employer does not have to provide it.
Non-guaranteed Overtime; where the employee is obliged to work overtime if required, but the employer is not obliged to provide it or pay in lieu.
Guaranteed/Compulsory overtime is covered in “normal working hours” under the ERA 1996 and therefore is to be included in holiday pay in respect of the full 5.6 weeks’ leave (Bamsey v Albon Engineering and Manufacturing plc [2004] IRLR 457).
Following Bear Scotland Ltd v Fulton and another UKEATS/0047/13, it is now clear that Non-guaranteed Overtime must also be included in leave taken under the Working Time Directive
Voluntary overtime (where there is no obligation on either side) was not dealt with definitively by the EAT in Bear Scotland, and so the position is less clear. However, it is possible that tribunals will interpret voluntary overtime as forming part of normal remuneration if a settled pattern has developed over a sufficient period of time to justify the label of “normal” pay. Employers are cautioned to take advice on this point on a case by case basis.
Does overtime have to be regularly worked in order to be included?
Possibly. According to comments in Bear Scotland, in order to be included in the calculation of holiday pay, workers will need to show that payment has been made for a “sufficient period” of time to justify the label “normal remuneration”. This would suggest that isolated occasions of working overtime do not count. Again there is insufficient comment to make a blanket statement on this and each case needs to be considered on a case by case basis.
Allowances?
Not normally. Costs ancillary to employment are excluded from holiday pay under the Working Time Directive (Williams and others v British Airways plc (Case C-155/10)). Expenses which reimburse workers for costs incurred such as travel or subsistence expenses are therefore excluded. Do not mix up genuine expense type claims with bonuses however as these are separate. Payments from tasks rather than reimbursement of expenses are different.
Performance Type Bonus?
Probably. It is difficult to argue that bonuses relating to performance were not part of normal pay and were not intrinsically linked to the tasks the workers were required to perform under the contract. The test really is whether the payment is “intrinsically linked” to performance of tasks by the worker under their contract, not whether it is “exclusively” so. Therefore a bonus that depends on team, rather than individual, performance is potentially within scope.
Annual discretionary (and other) bonuses?
Probably not. This is certainly one of the greyest areas arising from this case law. It is arguable that bonuses are generally intrinsically linked to performance of some element of the worker’s contract (it is rare to see a bonus that is entirely unrelated to past or future services however conversely, would it be likely that an annual discretionary bonus would be deemed within the scope of “normal remuneration”? Again, probably not.
Where a bonus is based solely on company performance, there is a strong argument that, provided there is no financial disincentive to taking holiday, the principles set out by the ECJ in Lock are not engaged.
Standby and emergency call-out payments?
Yes, according to the tribunal in Fulton and another v Bear Scotland Ltd, as they are intrinsically linked to the performance of tasks under the contract.
“Acting up” supplements?
Yes, according to the tribunal in Fulton and another v Bear Scotland Ltd as they are intrinsically linked to the performance of tasks under the contract. The EAT did not consider this point on appeal.
Tips and service charges?
Possibly. Again a grey area. Case law suggests that a tip counts as remuneration under the week’s pay provisions of ERA 1996 if it is paid through the employer’s payroll (as with tips paid via credit card), but not if the customer pays it in cash or if it is handled by a troncmaster, because in that case it is not paid by the employer.
Do these rules apply to the 5.6 weeks holiday under WTR or just the four weeks under the Working Time Directive?
Just the four weeks, according to the prevailing view of the courts, most recently the EAT in Bear Scotland.
Which four weeks is it?
In Bear Scotland Ltd v Fulton and another UKEATS/0047/13 the EAT suggested that it is for employers to choose which type of leave is taken when (that is, regulation 13 leave or regulation 13A leave). It seems likely therefore that employers can direct when regulation 13 holiday should be taken. Some employers will specify this in staff contracts or holiday policies.
How Far Back Can an Employee Claims?
There was genuine concern within UK employees, before the court made comment in Bear Scotland of the possibility of back pay claims for underpaid holiday pay stretching back to the inception of the WTR 1998 in October of that year, where they had worked for the same employee and the series of deductions remained unbroken.
This was changed significantly by the EAT’s judgment in Bear Scotland and a new statutory limit on retrospective unlawful deduction from wages claims, which applies to claims presented on or after 1 July 2015.
A “series of deductions”?
The ability to claim historical underpaid holiday by bringing an unlawful deduction claim based on a series has, in some circumstances, been curtailed by the EAT’s judgment in Bear Scotland, in particular the decision on what forms part of a series and when a series may be broken. The EAT found that in order to establish a “series”, there needs to be a factual and temporal link between the elements in the series. It set out its reasoning in relation to the temporal link only and concluded that:
- Underpaid holiday pay cannot be claimed as the last in a series of deductions where more than three months has elapsed between each deduction.
- It is for employers to determine which type of leave (that is, regulation 13 or regulation 13A) is being taken. Therefore, in the absence of an agreement to the contrary, employers can determine that the four weeks of Working Time Directive holiday has been taken first.
As annual leave under regulation 13A of the WTR 1998 (the additional 1.6 weeks’ entitlement) may still be calculated in accordance with the week’s pay provisions of ERA 1996, payment under that formula will not represent an underpayment. In some cases, the “compliant” payments in respect of the additional 1.6 weeks’ holiday will ensure that the series of deductions is broken in every holiday year, as there will be gap of at least three months between periods of non-compliant payments.
Does one instance of correct payment break a series of deductions?
Probably not, but this is a grey area, and it was not explicitly dealt with in the EAT’s judgment in Bear Scotland. Whilst it may be arguable, the only was to properly protect from future claims will be to consider ending, rather than interrupting, the series of deductions by starting to pay Working Time Directive holiday pay correctly, and continuing to do so.
Two-year Limitation Backstop
On the 8th January 2015, the Deduction from Wages (Limitation) Regulations 2014 (SI 2014/3322) came into. Regulation 2 amends section 23 of the ERA 1996 to introduce a two-year “backstop” period on most unlawful deductions from wages claims. This applies not only to claims for holiday pay, but extends to “wages” under section 27(1)(a) of the ERA 1996. This includes commission, bonuses, fees, holiday pay and other emoluments, whether payable under a worker’s contract of employment or otherwise.
The new limitation period applies to claims presented on or after 1 July 2015, and means that tribunals cannot consider deductions where the relevant date of payment was more than two years before the date of presentation of the complaint.
