As a follow up to Rachel’s blog yesterday, I thought it would be useful to explore further:
- some of the key issues arising out of Mr Justice Langstaff’s judgment (a link to the judgment can be found in Rachel’s blog here); and
- what steps employers might now be considering in light of the judgment.
The period an employee can go back claiming unpaid holiday pay
Mr Justice Langstaff arguably sought to give something to everyone in his judgment. As Rachel explained in her blog, he confirmed that employees receiving basic salary only and not their “normal pay” (e.g. basic salary and any shift allowances, commissions, overtime pay for non-guaranteed/required overtime normally received) for their holidays were being short changed. However, he also significantly limited an employee’s ability, when bringing an unlawful deductions from wages claim at least, to go back and claim for past holiday pay owed. This latter point is clearly an absolutely crucial part of the judgment as it had been feared that employees would potentially be able to claim for sums owed going back to the late 1990s (when the Working Time Directive was first implemented), and this is what was feared could “break” businesses.
Given the importance of the limitation on claiming backdated holiday pay, I wanted to examine this point in more detail. The limitation, as set out in paragraphs 70 to 83 of the judgment, arises as:
(i) an employee has to bring an unlawful deductions claim within 3 months of the last in a “series” of unlawful deductions;
(ii) Mr Justice Langstaff held that a 3 month period (i.e. the same period as the time limit for bringing a claim), where no unlawful deductions had been made, would break the chain in any “series” of deductions. As a result, if an employee had not brought a claim within 3 months of the last deduction prior to any such break, they would lose the ability to bring a claim in relation to those prior deductions;
(iii) the requirement to pay “normal pay”, rather than basic salary, for holiday, only applies to the 4 weeks holiday afforded by the EU’s Working Time Directive (“EU holiday”) and not to any additional holiday (“non-EU holiday”);
(iv) in relation to non-EU holiday, an employer paying basic salary only would be complying with its obligations;
(v) an employee cannot choose themselves which holiday during a holiday year is EU holiday and which is non-EU holiday. Instead, the first 4 weeks taken is, following Mr Justice Langstaff’s decision, deemed to be EU holiday and the remainder non-EU holiday;
(vi) there is therefore likely to be a reasonably regular 3 month break, in the case of most employees, between a period where their employer was not paying the correct rate of holiday pay in relation to the employee’s EU holiday and where it was paying the correct rate (see the examples below);
(vii) in most cases, employees are therefore likely to struggle to claim holiday pay going back beyond the current holiday year, at least as an unlawful deduction from wages claim.
Again given its importance, it is worth looking at (vi) above in more detail, using some specific examples. In both examples below, I have assumed, for sake of argument, that: (a) the employee is a full-time employee and has a holiday entitlement of 25 days per holiday year, plus normal public holidays (b) the employer’s holiday year is the calendar year; (c) the employer pays basic salary only for holiday; and (d) basic salary is not a fair reflection of the employee’s normal pay (given shift allowances, overtime which they are required to work etc).
In the 2014 holiday year, an employee takes 20 (i.e. their EU holiday) of their 25 day holiday entitlement by the end of September 2014 and the last payment in relation to those 20 days is paid in their September payroll on 28 September 2014. From October to December 2014, they take the remaining 5 days of their holiday (i.e. their non-EU holiday) and are, consistent with the employer’s obligations, paid their basic salary for those 5 days. There is therefore at least a 3 month period, before any new holiday year even begins and therefore before the employee can take any EU holiday in relation to that new holiday year, during which the employee was being paid the correct rate of holiday pay and no unlawful deductions were being made.
The 3 month period from 29 September 2014 to 31 December 2014 will, for the reasons set out above, break the previous series of unlawful deductions made in the period of the holiday year to 28 September 2014. As a result, if the employee failed to bring an unlawful deductions from wages claim within 3 months of 28 September 2014, they will lose their right to claim the holiday pay which should have been paid in relation to the 20 days holiday taken (i.e. their EU holiday) as an unlawful deduction from wages.
In the 2014 holiday year, an employee takes 20 (i.e. their EU leave) of their 25 day holiday entitlement by 30 November 2014 and the last payment in relation to those 20 days is paid in their November payroll on 28 November 2014. During December 2014, they take their remaining 5 days holiday (i.e. their non- EU leave). The employee does not then take any leave in the 2015 holiday year until March 2015 and again there is a 3 month period (i.e. December 2014 when only non-EU leave was taken and January and February 2015 when no leave at all was taken) where no unlawful deductions are made by the employer. As a result, if the employee failed to bring an unlawful deductions from wages claim within 3 months of 28 November 2014, they will lose their right to claim the holiday pay which should have been paid in relation to the first 20 days holiday taken during the 2014 holiday year as an unlawful deduction from wages.
As is evident from the above examples, in a significant number (if not the majority of cases), employees will struggle to claim holiday pay, as part of an unlawful deduction from wages claim, going back further than one holiday year, if they are not already out of time.
What view will the Court of Appeal take in relation to the time limitation point above?
Leave to appeal to the Court of Appeal has been given to all sides on all the issues considered in the judgment. However, whilst, in his final paragraph, Mr Justice Langstaff states that he does not believe any appeal in relation to the majority of the issues he considered would have any reasonable prospect of success, he does state that any appeal in relation to the time limitation point would be arguable. That said, the Court of Appeal, as Mr Justice Langstaff probably did, may also feel under pressure, for policy reasons, to prevent the floodgates to claims for back pay from being opened and therefore be reluctant to overturn his decision.
Mr Justice Langstaff’s judgment deals only with the issue of overtime which, whilst not guaranteed, the employee must work if asked to do so. It is clear that pay for this “non-guaranteed but required” overtime must be included in holiday pay where it is normally received.
This, however, begs the question of what should happen in relation to pay for overtime which is entirely voluntary. Whilst not addressed within Mr Justice Langstaff’s judgment (on the basis the facts he was concerned with did not involve voluntary overtime), I think it is a logical next step, given the conclusion that holiday pay should consist of “normal pay” (i.e. pay which is normally received), that voluntary overtime pay normally received by an employee should also be included in holiday pay.
The reference period
It is not clear whether an employee’s “normal pay” should be assessed over the 12 week period prior to the holiday in question (as provided for in the Working Time Regulations and the week’s pay calculation provisions of the Employment Rights Act) or over a “representative period” as suggested by the Court of Justice in Lock. My own view is that it will be risky to rely on too short a period, particularly where an employer is aware that this period will not be representative of the sums an employee is likely to normally receive.
Should “normal pay” include discretionary bonuses?
It is, in theory, arguable, based on the Court of Justice’s decision in Lock. However, given most bonuses are paid as one off payments at the end of a financial year, it may be possible to distinguish them from other types of more regular payments. For example, I think it is much harder to argue that an employee would be deterred from taking holiday, because their holiday pay does not include an element related to their annual bonus. In addition, a lot of bonus payments are intended to incentivise employees to stay, as well as rewarding them for work performed, which again may help distinguish them from shift allowances and overtime payments. With this latter point in mind, if your bonus scheme does not currently refer to providing an incentive for an employee to stay in employment, it is worth making this clear.
County Court claims?
It is possible that employees may be able to try and circumvent the time limit issues referred to above by seeking to recover holiday pay due via breach of contract claims in the county court (where the limitation period is 6 years from the relevant breach). On the face of it, it is difficult to see why this would not be possible (subject to the terms of the relevant employee’s contract of employment) and would, as stated, potentially allow an employee to go back 6 years, albeit not all the way back to 1998. Whilst there is a more restrictive cost regime in the county court (where a party is at risk of having to pay the other side’s legal costs should they lose), this is unlikely to put off employees who believe they have strong claims.
This issue, I am sure, is something that the task force the government announced yesterday, set up to look at the impact of Mr Justice Langstaff’s judgment, will be considering.
What steps should employers be taking now?
There are a number of steps an employer might consider, in light of the judgment. For example:
- if they have not already, employers should consider (given the Williams, Lock and now the Bear case) what is “normal pay” in relation to their own employees;
- employers should assess the scope of their potential liabilities, and consider setting a sum aside to deal with those liabilities (should it become necessary);
- employers should pay all EU holiday going forward, based on employees’ normal pay;
- an employer may though want to consider whether, administratively, it wants to pay different levels of pay for EU and non-EU holiday. Whilst it is permitted to do so, it might decide that this would be too much of an administrative burden and instead decide to pay the higher rate for all holiday. The next two points below assume that an employer does not want to do that;
- to limit the level of future holiday pay, an employer might want to limit the amount of overtime requested and/or consider using casual staff more to cover overtime, rather than regular employees;
- whilst fairly drastic, an employer might even want to consider imposing a 3 month prohibition on the taking of holiday, to ensure a break in relation to any series of unlawful deductions;
- an employer with an annual bonus scheme should emphasise within the scheme rules that the scheme is forward looking and not just a reward for past services due.