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Overtime to be Considered for Holiday Pay

About The Author

Hannah Larsen (Writer)

Hannah graduated from the University of Bristol in 2013, with a LLB Hons. Hannah works for an organisation issuing multinational employers with guidance on employment law and labour relations across the globe, and is undertaking her BPTC part-time at BPP Holborn.

At 10.30am on November 4th 2014 the judgment of Bear Scotland Ltd and others v David Fulton and others (2014) was published, providing a long awaited answer to the pivotal question of whether holiday pay should include an amount for overtime work. HHJ Langstaff’s judgment contained some elements that were unsurprising and others that were somewhat sneaky, as well as some propositions that are sure to raise issues in the future. Fundamentally however, to the discontent of the Department of Business, Innovation and Skills and many employers, HHJ Langstaff held that when calculating an employee’s entitlement to holiday pay employers must include an amount in respect of overtime work that employees are guaranteed or are required to complete.

The test case concerned three employers: Bear Scotland, a road maintenance company, Hertel (UK) Ltd, an industrial services group, and AMEC Group Ltd, an engineering project management firm. An additional case had been joined (Freightliner v Neal) but was settled shortly before trial. It was alleged that (amongst other things) each employer concerned had made unlawful deductions to employees’ wages, contrary to s. 13 of the Employment Rights Act 1996, by failing to consider overtime, and other payments linked to their work in their holiday pay.  

The Unsurprising

The first task for HHJ Langstaff was to assess the scope of Article 7 of the Working Time Directive (2003/88/EC) (“the Directive”), as implemented into UK legislation by the Working Time Regulations 1998 (as amended in 2003). Broadly referring to an assessment of Article 7 is slightly misleading however, as the Article merely provides that employees should receive four weeks of paid annual leave. Thus it is necessary to refer to the implementing legislation, in particular Regulation 16, which requires that employees receive ‘a week’s pay in respect of each week of leave’ and s. 221 to 224 of the Employment Rights Act. Unfortunately, as Darren Newman describes in his article ‘Why holiday pay has to include overtime’ the meaning of a week’s pay as allegedly conveyed by the Act ‘doesn’t exactly leap out at you’. Once you have waded through the provisions you are left with the helpful information that a normal week’s wages is ‘a normal week’s wages’ and if there is no ‘normal’ week it is the average of 12 weeks’ wages.

The employers in Bear argued that the calculation of normal wages did not require inclusion of overtime payments where an employer was not obligated to provide the employee with overtime hours. This was an attractive proposition for Hertel and Amec who had specified in the central supplementary project agreement (essentially the employment contract) that overtime would be required but not guaranteed, and as a result would not be included in calculations of holiday pay. (The agreement is described at paragraph 20 of the judgment and this provision is discussed more specifically at paragraph 90.) 

Ultimately this argument was always unlikely to succeed, as this is not the first time that the scope of holiday pay has been considered: the Court of Justice of the European Union (“CJEU”) have previously discussed it in both Williams and others v British Airways plc. (Social policy) [2011] and Lock v British Gas Trading Ltd [2014]. In fact, Advocate General Bot referred to an established ‘trend’ of judgments in his opinion for Lock. HHJ Langstaff also reflects on the ‘settled view’ of the CJEU as to meaning of Article 7 in his judgment, implying that to some degree the discussion of the scope of Article 7 always had an inevitable outcome.

The earlier case of Williams concerned a number of British Airway’s pilots whose remuneration during working periods consisted of basic pay, variable amounts for time spent away and a supplement for time actually spent flying. Although the case in fact concerned the Civil Aviation (Working Time) Regulations 2004 and the Aviation Directive 2000/79/EC, HHJ Langstaff confirmed that the approaches of these Regulations were identical to that of the Working Time Regulations and therefore the case could be considered in his judgment.

In the more recent case of Lock, the employee’s pay was made up of a base salary plus commission for sales of his employer’s products. The commission in fact equated to over 60% of his take home earnings at an average of just over £1900 per month. As a result the inclusion or exclusion of this amount in the calculation of his holiday pay had a significant effect on his financial situation. 

The CJEU held in both cases that annual leave pay must be calculated ‘in such a way as to correspond to the normal remuneration received by the worker’. This was expanded upon in Williams, as the CJEU held that an employee was entitled to representations in their holiday pay for all remuneration elements that were ‘intrinsically linked’ to the work they had completed. Hence, the underlying obligation is that the employer is required to ensure that the employee is in the same position financially whilst on annual leave as if they had been working. To this end, the CJEU held in Lock that Article 7 prevents national legislation or practice from allowing employers to pay employees an annual leave amount that is restricted to their basic salary.

The prevalence of this requirement was highlighted in Lock, where it was set out that employers must account for not only the commission an employee would be paid whilst on annual leave owing to arrears in payment, but that which he would have earned in the period of his absence. This requirement ensures that upon an employee’s return to work they do not suffer a subsequent reduction of wages.

Although HHJ Langstaff readily accepted these propositions, it was not without thorough argument on the part of the employer’s representatives in Bear. Reference had been made in Williams to the ‘inconvenient aspects’ of the employee’s work, which were reflected in their pay and, as such, a tenuous submission was made in Bear that overtime could not be seen as an inconvenience. This submission was supported by the Secretary of State, as represented by Mr. Tolley QC, who also sought to distinguish Williams completely on the basis that it was not concerned with overtime. HHJ Langstaff, however, rejected these propositions, instead adopting Michael Ford QC’s submission that, in the absence of the consistent presence of the ‘inconvenience aspect’ in the Court’s judgment, holiday pay was to comprise of all components, beyond basic salary, which were intrinsically linked to the employee’s performance of their work.

The Sneaky

Having set out the inevitable basic position, HHJ Langstaff went on to limit this with two sneaky propositions. These limitations disabled the anticipated devastating effect on employers, as publicised by some of the media (for example the BBC and the Guardian), that millions of employees could bring claims for sixteen years’ unpaid overtime since the Regulations came into force.

First, the inclusion only applies to the annual leave which is guaranteed to employees on a community level, that is, the entitlement of four weeks’ paid leave (20 working days) provided by Regulation 13 of the Directive. The subsequent eight days’ of leave, which are provided by Regulation 13A of the Regulations, are not subject to the inclusion requirement as these are provided as a result of domestic law. (Unfortunately the Working Time Regulations have not been updated on legislation.gov.uk in line with subsequent amendments, hence Regulation 13A must instead be found in s. 2 of the Working Time (Amendment) Regulations 2007.)

Distinguishing between holiday taken as a result of the Directive and the Regulations may cause payroll departments a bit of a headache. HHJ Langstaff appears to purport that the first 20 working days of leave taken by an employee in the year should be deemed as the ‘Directive days’ and subsequent days are the ‘Regulations days’, by suggesting that the additional days provided by domestic legislation can only be taken after the basic European entitlement. Further, this position can be complicated by the inclusion of bank holidays in an employee’s annual leave allocation as outlined by Chesca Lord, a barrister at Cloisters Chambers, in her article considering back pay.

Second, the employees in each case sought redress by claiming that their employers had made unlawful deductions from their wages by failing to include amounts for overtime in their holiday pay. This is the correct procedural means of redress; however, it is substantially restricted as claimants are provided with only three months in which to make a complaint. The clock starts ticking on the date of the payment from which the deduction was made, or if a series of deductions have been made, from the last deduction (see s. 23 of the Employment Rights Act 1996). Chesca Lord, in her aforementioned article, highlights the distinction between the date of payment and date that the holiday was taken, alerting employers that a claim may be valid later on than expected where payment is made in arrears. A discretion is also provided to the tribunal to consider complaints made after expiry of the period, where it is satisfied that it was not reasonably practicable for the complaint to have been brought within it.

The effect of this procedural requirement is such that, unless there is a series of deductions, employees cannot make a valid claim for the amount outside of the three-month time limit, reflecting the legislative intention that claims have to be brought promptly. HHJ Langstaff explained that whether a ‘series’ existed is a question of fact and usefully defined a series to occur where there is a similarity of subject matter and a sufficient frequency of repetition, providing factual and temporal links between the deductions. Moreover, he limits the potential for a series to warrant a late complaint by stating in paragraph 81:

… [A]ny series punctuated from the next succeeding series by a gap of more than three months is one in respect of which the passage of time has extinguished the jurisdiction to consider a complaint while it was unpaid.

In addition, Olivia Faith-Dobbie, a barrister at Cloisters Chambers, proposes in her analysis of the judgment that the distinction drawn by HHJ Langstaff as to the holiday entitlements provided by the Directive and the Regulations have the effect of breaking any series of deductions where an employee uses one entitlement and then the other. The consequence is that claimants are unlikely to be able to recover any deductions incurred more than a year ago.

Subsequent Issues

Primarily, it is necessary to question whether the domestic law can be interpreted to give effect to HHJ Langstaff’s explanation of the meaning of Article 7, as per the requirement on domestic courts to construe implementing legislation ‘as far as possible in light of the wording an the purpose of the directive’ (Marleasing SA v La Comercial Internacional de Alimentacion SA [1990] C-106/89).

HHJ Langstaff reflected on the intention of Parliament in the drafting of the Working Time Regulations, which was to give full and accurate effect to the purpose of the Working Time Directive. He set out that ‘if, seen through a modern lens, the words [of the implementing legislation] do not achieve that, then to adopt a conforming interpretation is not doing violence to the intention of Parliament but instead respecting it.’ HHJ Langstaff dismissed submissions that it was impossible to construe the Regulations to conform to the decided meaning of Article 7, but did suggest that ‘“in the case of the entitlements under regulation 13, section 223(3) and 234 do not apply”’ should be appended to Regulation 16(3)(d).

Within the practical application of the judgment itself there are also a number of issues. Prevalently, Olivia Faith-Dobbie noted in her aforementioned article that ‘there is no definitive statement in the judgment to confirm that purely voluntary overtime (that which the employer is not obliged to offer and the worker is not obliged to accept) would also be included’. Faith-Dobbie suggests that if voluntary overtime is regularly worked such that it would constitute part of the worker’s normal pay, it should be included, reflecting on the overall ethos of the CJEU judgments and HHJ Langstaff’s comments throughout the judgment. However, without a definitive conclusion to this question, there is scope for further litigation and query.

Further, the endorsement of Lock presents an interesting question as to whether an employee’s average pay should be determined as per the twelve week averaging period provided in s. 223 of the Employment Rights Act, or over a ‘reference period which is considered to be ‘representative’ as per the CJEU in Lock (para 34), where their weekly pay varies from week to week. This proposition highlights an underlying question as to whether the 12 week reference period used in the Employment Rights Act is an appropriate time period in which to calculate a representative average, for example when comparing the hours of overtime that may be worked during the festive period to those worked during the rest of the year.

The Future

HHJ Langstaff noted that many of the issues raised in the judgment are in need of definitive resolution, reflecting on the considerable publicity the case had attracted. To that end, he granted permission to appeal to the Court of Appeal, with particular emphasis on the propositions as to the scope of Article 7 and whether a conforming interpretation of the Regulations could be achieved.

Within hours of the judgment, Vince Cable, the business secretary, announced in a Government Press Release that a taskforce will be set up not only to assess the impact of the judgment, but also how it can be limited. The release appears to be a knee-jerk reaction to an unwanted result for the Department of Business, Innovation and Skills, who stressed in the Release that the Government has previously argued against the inclusion of overtime in holiday pay. Notably, the taskforce will consist of government departments and business representatives, for example the Confederation of British Industry and the Federation of Small Businesses, but it does not seem as though any employee representatives will be consulted.

Although, HHJ Langstaff doubted the prospects of success in any subsequent appeal, the media attention and government reaction mean that it is highly unlikely that this is the last that we will hear of the holiday pay saga, even if the ultimate effect on employers, in my view, is not as devastating as anticipated.

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Tagged: Commercial Law, Employment Law, European Union

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