Are you paying holiday pay correctly? Here’s what the EAT has said today

The Employment Appeal Tribunal (“EAT”) has now handed down its decision in the holiday pay cases. Key points are:

• Workers should receive holiday pay which reflects their “normal remuneration”. The cases before the EAT dealt with regular non-guaranteed overtime which the EAT held was normal remuneration. Non-guaranteed overtime is arguably distinct from voluntary overtime as being overtime that an employer may offer but where it does so, the worker is required to undertake it. However, arguably the EAT decision does not rule out the potential for some voluntary overtime arrangements to impact on holiday pay where in fact in reality an employee considers they must accept regular overtime offered by their employer. Less clear is the case of an employee who has a regular pattern of working overtime to increase his or her normal remuneration albeit there is genuinely no obligation from the employer on her to do so.
• The EAT’s interpretation of the WTR only applies to the four weeks statutory holiday provided under European law in the Working Time Directive (“WTD”) and not the additional 1.6 weeks the UK Government subsequently introduced. In practice, going forward, many employers may wish to treat all statutory holiday the same for administrative reasons but where the impact on holiday pay is significant the EAT’s decision in this respect is helpful.
• A significant concern has been the potential ability for workers to make historic claims of incorrect holiday pay spanning back many years under the unlawful deduction of wages provisions. The EAT has indicated that claims for arrears of holiday pay will potentially be out of time if there has been a break of more than three months between successive underpayments. Further, workers will be unable to essentially create a “series” by designating certain holiday as “WTD” holiday and earlier holiday within the holiday year as not. We suspect this suggestion of three months is more a signal for employers dealing with historic claims rather than a flag to continue under-paying holiday by relying on a three month gap between payments going forward.  The EAT did not clarify whether an employee can bring a breach of contract claim in the high court/county court for breach of statutory holiday pay (the limitation period of which is six years) so that is still unknown and likely to be the subject of much debate.

Whilst holding that a reference to the European Court of Justice was unnecessary, the EAT has given leave to appeal to the Court of Appeal. However, it indicated that it was only the third bullet point above which it considered may have any prospect of success on appeal. In the meantime, employers have some comfort against the risk of potentially crippling historic claims.

What should employers do now?

• Employers will now need to carefully scrutinise and potentially change their holiday pay practices going forward where workers receive regular payments in addition to a basic salary. We have developed an online holiday pay risk analysis tool to enable employers to understand their current holiday pay practices and the impact of these rulings. Please contact your usual OC Contact for more details.
• For those who regularly pay commission, the Employment Tribunal hearing in Lock is scheduled for next February. However, given the reasoning by the EAT today, employers would be sensible to start reviewing their commission structure and making potential provision for additional holiday pay. The main point of concern will be how the element of holiday pay reflecting commission should be calculated and whether the Employment Tribunal may be prepared to interpret the WTR differently on this point. We shall be happy to advise you further on this.

A copy of the decision is here.