EAT hears holiday pay appeals

by DLA Piper

Kate Hodgkiss, a Partner in our Edinburgh office, comments: At the end of last week the Employment Appeal Tribunal (EAT) heard complex legal arguments in the appeals in Bear Scotland and Hertel/Amec; better known as the holiday pay cases. The appeals will determine primarily (i) whether overtime should be included in the calculation of holiday pay and (ii) if so, whether employers should be liable for back pay, possibly over a period of several years.

 The EAT had to consider 3 main issues:

  1.  Does Article 7 of the Working Time Directive require overtime to be included in holiday pay?
  2. If so, can UK law be interpreted in such a way to give effect to this?
  3. If holiday pay has been incorrectly calculated as a matter of EU law, does the fact that some holiday pay payments made under UK law will have been lawfully calculated ‘break’the series of unlawful deductions such that claims for back pay are limited?

 The EAT heard arguments on these issues from counsel on behalf of both the employers and employees.

 Article 7

The issue of what should be included in the calculation of holiday pay arises from a decision of the ECJ, Williams v BA. In many cases UK law currently excludes payments such as overtime, commission and bonus from holiday pay. However, the ECJ in Williams said that a worker is entitled, during his annual leave, not only to the maintenance of his basic salary, but also, first, to all the components intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided. Following Williams, the question arose what types of payment are ‘components intrinsically linked to the performance of the tasks required under the contract of employment.  In Lock v British Gas the ECJ held that commission should be included.

In the EAT in Bear/Hertel/Amec, lawyers for the employers and for the Government argued that Article 7, as interpreted in Williams, does not require overtime to be included, either because it is not intrinsically linked to the performance of tasks required under the contract where the employer is not required to offer overtime, or because Williams should be interpreted restrictively as only applying to supplementary payments.

Lawyers for the claimant employees, on the other hand, argued that overtime is plainly normal remuneration and should be included.

Interpretation of EU law

UK courts are under an obligation to interpret UK law as far as possible in compliance with EU law. As such, if Article 7 does require overtime to be included, the court needs to examine the Working Time Regulations and Employment Rights Act to determine whether they can be read in a way which gives effect to EU law.

Lawyers for both the employees and the Government argued that UK law can be read in this way, although they were arguing for different interpretations of the EU law (see above). Lawyers for the employers, however, argued that it is simply not possible to interpret UK law in this way; in this respect, they rely on 2 main arguments (i) that employers thought they were complying with the law when excluding overtime from holiday pay and to retrospectively put them in breach of the law would be in breach of the principle of legal certainty; and (ii) it is not possible to read words into the Working Time Regulations in order to give effect to Article 7 as this would make the scheme of the Regulations unworkable.

Series of deductions

The final issue is whether the claims were in time. The claims have been brought under the unauthorised deduction from wages provisions of the Employment Rights Act 1996. A claim may be brought within three months of an unauthorised deduction from wages, or, if there is a series of deductions, within three months from the last in the series. Lawyers for the employers sought to argue that as Williams only affects the 4 weeks’ basic statutory entitlement, each time the employees took the additional 1.6 weeks’ leave provided under Regulation 13A of the Working Time Regulations, they were paid the correct holiday pay and this ‘broke’ the series of deductions. That would limit, possibly even extinguish, much of the liability for back pay. However, the claimant employees argue that there could be a series of deductions linked by a common feature even when the series is interrupted by payments of a different type. 

Interestingly there was very little argument regarding how far back the employees might be able to claim; counsel for the Government suggested that any deductions further back than six years would be out of time but this argument was not developed.

 Where does this leave us?

Judgment is expected in October/November but it is possible that the judge may wish to make a reference to the ECJ. Whatever the outcome, it is also likely that there will be an appeal. This could complicate matters still further, as an appeal in Bear would go to the Scottish Court of Session, whereas an appeal in Hertel/Amec would be to the Court of Appeal. However, the EAT decision may give employers some indication of the direction of travel and may provide some indication whether there is any opportunity to limit liability pending a final determination of the issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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