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Holiday pay – the EAT decides

My six year old daughter started squeaking at the radio this morning saying ‘Mummy, listen, they’re talking about you and your law stuff!’. Once I got over the shock of a phantom Today programme appearance of which I was blissfully unaware, I realised that she’d heard reference in the news headlines to the Employment Appeal Tribunal holiday pay judgment due to be handed down today. There’s been a sudden heat generated by these cases in the press and a quite a bit of interesting mis-reporting going on – it is (sadly) rather gratifying for an employment lawyer to get something of a buzz from hearing the stuff of our day jobs widely (and often inaccurately) blazed across the papers.

Anyway, judgment in the highly publicised cases of Fulton v Bear (Scotland) and Wood v Hertel and Amec (see my earlier post) has indeed just been published.  For those of you who would like to immerse yourselves in the full 48 pages (the likely length of the judgment was hotly debated on twitter by impatient employment lawyers – me included – at 7am today), you can read it here.  I have yet to digest the full judgment which has only just gone online, but for those who would like a headline summary, Mr Justice Langstaff’s findings are, in brief, as follows:-

  • The key outcome – non-guaranteed overtime (ie, overtime which the employer does not have to offer but the employee must work if offered) should be taken into account when assessing holiday pay, for the purposes of the four weeks’ holiday entitlement deriving from the Working Time Directive.  This is, in the EAT’s view, a ‘natural development’ from earlier case law.
  • The EAT found that Article 7 of the Working Time Directive requires workers to be paid ‘normal remuneration’ during the holiday to which they are entitled under EU law. In broad terms, this means their typical average pay, not only the basic hours' pay on which entitlements have historically often been calculated. This means that as well as non-guaranteed overtime, shift payments and other comparable payments forming part of ‘normal remuneration’ should be included in the holiday pay calculation. This part of the judgment does not apply to UK leave (ie the additional 1.6 weeks’ leave provided under the Working Time Regulations) – but one has to query in practice the extent to which employers are really likely in future to operate two different rates of holiday pay. The retrospective effect of this finding, though, is potentially very significant (see below).
  • The EAT said that it was obliged to interpret domestic legislation in light of the wording and purpose of the Directive and hence to "read down" the Working Time Regulations to achieve compliance with the requirements of Article 7 — potentially giving workers who have been paid holiday pay representing only their basic hours' work significant claims for unlawful deductions from wages.  
  • However (and this is arguably a big ‘but’), the scope for employees to recover underpayments via unlawful deduction from wages claims is limited. The EAT held that there are two requirements for a ‘series of deductions’ – sufficient similarity to provide a factual link between the deductions, and a sufficient temporal link. The EAT found that workers cannot claim holiday pay underpayment as an unlawful deduction (using each shortfall as the last of a series of deductions) where a period of more than three months (the limitation period for an unlawful deductions claim) had elapsed between the deductions. See paragraph 81 of the judgment for further details.  In other words, if there is a gap of more than three months in any alleged series of deductions, the Employment Tribunal loses jurisdiction to hear claims for the earlier deductions. Further, workers are not entitled retrospectively to designate which holiday was "EU" holiday under regulation 13 of the WTR and which was additional domestic leave under regulation 13A so as to create an unbroken "series". On the face of it, these conclusions may potentially severely restrict the ability of workers to recover really significant historical underpayments – given that there is likely to have been a relatively lengthy gap at the end of a given leave year where there were no unlawful deductions from wages (as only additional non-EU leave was taken) then realistically this will serve to break the series of deductions.  In practice, this could well mean that many historic holiday pay claims will be confined to the most recent holiday year or indeed, extinguished altogether. There has already been much speculation as to whether this finding can realistically be upheld on appeal, and certainly the implications appear to be unsettling for employees.    

It is fair to say that the words ‘floodgates’, ‘time bomb’ and ‘blame Europe’ will feature heavily (and, given the last point above, perhaps inaccurately) in much of the reporting around this judgment.  The IoD has already warned of businesses being ‘wiped out’ and the Federation of Small Businesses claim that around 400,000 firms in the UK are likely to be affected (covering approximately five million workers).  But initial commentary amongst lawyers and academics suggests that (a) the impact may be far less significant for employers than had been feared (though it may yet drive more claims out of the Employment Tribunal and into the jurisdiction of the county court); (b) some of the reasoning in the judgment is a little tenuous and that public policy may have played a significant role in the eventual decision and (c) we have less certainty for the future than might have been hoped.  David Hunt is working on a fuller analysis of the case which will benefit from longer reflection on the judgment, and he will comment on where all this leaves us and what immediate steps employers might consider taking: but I hope that for the moment this gives you a quick update on the headline outcome.  One thing is for sure – this is not the end of the story: permission for leave to appeal to the Court of Appeal has already been granted to each party, on all points on which they lost.

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