HOLIDAY PAY COMMISSION & OVERTIME

Presented by

MALCOLM MASONEnglish Solicitor & Attorney-at-Law (NY)

Head of Employment - iLaw Legal Services Ltd.

A Workshop on Auto-Enrolment and Holiday Pay by Quantum Advisers & iLaw Legal

Services Ltd.

City of London

18 November 2014 at 4:30pm

RECENT SIGNIFICANT DECISIONS REGARDING HOLIDAY PAY

• May 2014 - European Court of Justice (ECJ) – Lock v British Gas Trading Ltd (C-539/12) addressed the

issue of whether commission should form a component of

holiday pay; and

• November 2014 - UK Employment Appeals

Tribunal (EAT):– Bear Scotland Ltd and others v Fulton UKEATS/0047/13/BI– Hertel (UK) Ltd v Woods and others UKEAT0160/14/SM– AMEC Group Ltd v Law and others UKEAT0161/14/SM

Colloquially together called the Bear Scotland Case, they

addressed the issue of whether certain overtime should form

a component of holiday pay

THE EU WORKING TIME DIRECTIVE

• The UK Working Time Regulations 1998 (1998/1833) (WTR 1998) implemented the original EU Working Time Directive (93/104/EC) of 23 November 1993 which is now consolidated as Directive (2003/88/EC) (WTD).

• Interestingly, this EU Directive did not evolve from the EU as an employment law but rather as a health and safety law and this history plays some role in why we have these new court decisions illustrating the ECJ judicial rationale that employees must not be placed at a financial disadvantage when taking statutory holiday.

THE UK WORKING TIME REGULATIONS

The UK Working Time Regulations 1998

(1998/1833) (WTR 1998) cover the following

areas:  – Maximum weekly working time– Agreement to exclude the maximum– Length of night work– Health assessment and transfer of night workers to day work– Pattern of work– Records– Daily rest– Weekly rest period– Rest breaks– Entitlement to annual leave– Compensation related to entitlement to leave– Dates on which leave is taken– Payment in respect of periods of leave

STATUTORY ANNUAL LEAVE (1)• 5.6 weeks' annual leave in each leave year

(i.e., 28 days for those who work five days a week). This is made up of:

– The right under the WTD to a minimum of four weeks' annual leave (20 days for full time employees) each year transposed into national law by Reg. 13(1) WTR (The EU 20 days of annual leave); and

– The UK domestic right to an additional 1.6 weeks' annual leave (8 days for full time employees) each year which represents the number of UK public holidays . However, there is no need to use these days on public holidays (Reg13A) (The domestic addition of 8 days of annual leave)

STATUTORY ANNUAL LEAVE (2)

• A part-timer is entitled to 28 days' holiday reduced pro rata, according to the number of days they work.

• Many employers provide holidays greater than this statutory entitlement.

HOLIDAY PAY - UNTIL NOW

• Employees are entitled to be paid at the rate of one week’s pay for each week of statutory holiday leave (WTR Reg.16).

• Holiday pay is calculated according to complex rules (sections 221 to 224 Employment Rights Act 1996) - essentially based on their average pay during the normal working hours over the previous 12 working weeks.

• Where, as in many cases, working hours are static and contractually overtime worked is not paid, the calculation is normally easy - typically annual salary ÷ 52 weeks.

• Where there are no normal working hours and/or overtime is paid the calculation can be far more complex

HOLIDAY PAY - GOING FORWARD

• As a result of the Lock and Bear Scotland Case decisions, commission (Lock) and certain overtime (Bear Scotland Case) will now need to be included in the calculation of one week’s pay for holiday pay purposes but only in respect of the EU 20 days of annual leave and not the entire statutory 28 days and any additional contractual entitlement.

• The Bear Scotland Case as a decision of the EAT is certainly appealable and the EAT Presiding Judge in his decision encourages an appeal particularly on the area of how to calculate the overtime element of holiday pay.

SO WHERE ARE WE?• The ECJ case Lock is binding - commission is

now part of holiday pay.• However, the decision stated that the issue of

how to calculate the commission element is a matter for national legislation and practice and the case was remitted back to the referring Employment Tribunal (ET) for that purpose.

• The ET case is set down for a hearing in the Spring of 2015 but may well take many months for a decision and which could then be appealed.

• What seems more likely in practice is that the EAT Bear Scotland Case (which also discusses the Lock Case) will quickly be appealed to the Court of Appeal who it is hoped will provide clear guidance on not only what overtime is to be included in holiday pay but how employers should calculate both the commission and overtime elements.

ACTION PLAN FOR YOUR COMPANY

1. Review your written and oral commission arrangements and plans.

2. Take into account that going forward most commission will be a mandatory element of holiday pay.

3. Accordingly, revise as far as permissible (both contractually and commercially) your commission plans to take this new fiscal exposure into account.

4. Consider your company’s exposure for claims relating to any unpaid commission and/or overtime element of holiday pay for the last six years and possibly even since 1998 when the WTR became law.

5. Review your contractual arrangements and also your practice relating to the use of overtime and consider modifications to take into account the Bear Scotland Case.

WILL THE GOVERNMENT GET INVOLVED?

1. This is already happening given the serious implications for UK businesses.

2. The government appeared in the Lock case at the ECJ, as it routinely would with UK cases.

3. The government formally appeared in the EAT Bear Scotland Case as an intervener with leading counsel at the hearing and will no doubt similarly appear on the appeal.

4. A task force comprising of a selection of government departments and business representative groups has been (or is being) put together to provide a forum to discuss how the impact on business can be limited.

POSSIBLE OUTCOME OF GOVERNMENT INVOLVEMENT

(My personal professional views only)

1. Given the radical changes to holiday pay required by these cases it is clear that a good part of the WTR 1998 needs repealing and revising to take into account the ECJ decision and to provide clarity and consistency for employers and employees.

2. Following: (i) the task force reporting on the matter, and (ii) an appeal (and decision) of the Bear Scotland Case to the Court of Appeal, the then government of the day could urgently introduce legislation repealing and revising the WTR 1998 with significant amendments, particularly to the calculation of holiday pay, to take into account the requirement that commission and overtime elements must be taken into account.

BUT … BUSINESSES SHOULD BE CAUTIOUS

3. Because any new legislation cannot overturn the ECJ Lock Case.

4. Any new legislation is extremely unlikely to remove employers liability for claims relating to unpaid elements of holiday pay that arose during the previous six years.

5. However, such claims will still need to be brought within three months of the last non-payment (unlawful deduction), and if a series of unlawful deductions going back up to six years is claimed then such deductions cannot be less than three months apart otherwise the “series” will be broken as provided in the Bear Scotland Case.

THE FUTURE ON HOLIDAY PAY

Given not only these recent decisions but other holiday pay cases which have been determined by the ECJ in recent years and also the position of the EU, there is little doubt that ultimately the concept of rate of a week’s holiday pay will be required to include not only commission and overtime but all and any other payments (what the ECJ describes as normal remuneration) which the employee is deprived from earning while on holiday and which, using EU parlance, would encourage or be seen to encourage the employee not to take the holiday, that is, a health and safety issue

Malcolm MasonEnglish Solicitor & Attorney-at-Law (New York) Head of Employment

iLaw

malcolm.mason@ilaw.co.ukwww.ilaw.co.uk

Mob: +44 (0)7516 045756Tel: +44 (0)207 489 2059Fax: +44 (0)207 117 4737

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