1) When calculating holiday pay employers will require to include an element to cover:
a) non guaranteed overtime (the law already provides it should include guaranteed overtime) and
b) travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration.
By implication it is likely that other forms of payment that are normally made to employees when working should also be factored into holiday pay. The Courts have already decided that this includes commission. However, a variety of other types of payment that employers make are likely to have to be included. There is likely to be more litigation to determine which additional elements form part of holiday pay. The general rule is that if the remuneration is intrinsically linked to the performance of the tasks under the contract then this will form part of the holiday pay calculation.
2) The EAT distinguished between:
a) the 20 days paid leave under the Working Time Directive which is incorporated into the Working Time Regulations and
b) the additional 1.6 weeks which the Working Time Regulations provide which is not required by European law.
The decision only applies to the first 20 days required by European law. This means that normally when calculating holiday pay you will not require to include an element to cover non guaranteed overtime or other similar payments for any holidays in excess of 20 days per year.
However, we would recommend that your employment contracts are checked in case they are drafted in such a way that suggests that the employee's holiday entitlement is to be calculated in accordance with the Working Time Directive or the Working Time Regulations. This could mean that you are required to pay the enhanced level of payment for all of the holiday entitlement.
The effect of this decision means that an employer may operate a two tier system with the first 20 days holidays being paid at a higher rate than the rest. The first 20 days of the holiday year should be treated as the European element.
Employers will have to ensure that it has in place systems to accurately record the holidays and the number of days taken by employees. An employer could elect to include overtime and other additional qualifying payments for all holiday entitlement. However, that could be expensive and it is not a legal requirement. You will though need to consider the additional administrative cost of ensuring the correct levels of payments are made.
It should be emphasised that the Employment Appeal Tribunal's decision applies where employees have normal working hours and their remuneration during normal working hours does not vary with the work done. Until now it was thought that holiday pay would simply cover basic pay in that scenario. The Working Time Regulations already provides that in certain circumstances holiday pay is calculated over a 12 week reference period. It has become apparent in some cases that employers may have been calculating holiday pay on the wrong basis under the existing wording of the Working Time Regulations. It may therefore be worth seeking advice on this issue. If employees should be having their holiday pay calculated over a statutory 12 week period under the Working Time Regulations then this will apply not only to the 20 days but the additional 1.6 weeks also.
3) How much is to be paid?
The earlier European Court decisions have stated that the calculation of the payments to be included in holiday pay should be made over a "pay reference period" which is "representative". This means that a period should not be chosen which favours one party or another. It also means that there is no exact period but it could be a period within a reasonable range. There is no case law on this at present. If there are peaks and troughs then a longer period would be more representative (say up to a year). This would avoid inflated payments where a large amount of overtime was worked immediately before a holiday. If however the pattern of payments were very regular then a shorter period (say 12 weeks) might be appropriate.
Employers may of course decide to re-examine their working practices where the extra hours worked are discretionary.
4) Backdated claims
The decision is likely to restrict the risk of significant backdated claims for holiday pay where they are brought as unlawful deductions from wages claims in the Employment Tribunal. The concern is that there is a risk of backdated claims to October 1998 when the Working Time Regulations were implemented. The EAT has held that claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments (unless it was not reasonably practicable to present the claim within the 3 months in which case there may be an extension of no more than a reasonable period of time).
This has to be considered in the context of the employee's rights relating to 20 days under the Working Time Directive. The additional 1.6 weeks holiday will not normally require to be paid at the higher rate. In practice this could mean that previous underpayments were made but were then followed by a further 1.6 weeks holiday which was not underpaid. If there is a gap of more than 3 months between underpayments then this will restrict backdated claims.
However, this case does not deal with potential claims for breach of contract in the courts. If the courts do have jurisdiction to hear such claims they can be brought for up to 5 years in Scotland and 6 years in England from the date of the breach. There is no authoritative decision on this issue although an earlier High Court decision suggested that a breach of the Working Time Regulations was not intended to provide a civil court remedy. However, it is understood that this issue is likely to be determined in tests cases that are due to be heard shortly.
The importance of this decision may mean that it will be appealed with no final outcome for several years.