After being the hot HR topic of early summer, the calls for action in respect of longstanding underpayment of holiday pay seem to have quietened down somewhat. Perhaps it is the fact that the Neal v Freightliner case settled before it got to the Employment Appeal Tribunal (EAT)? Or perhaps it is because we are still awaiting the EAT’s judgment in the other appeals, co-joined with Neal? Regardless of the stimulus for this disengagement by the HR community, a storm of litigation is still brewing and the risk rumbles on.

Already claims-management companies and ‘no win, no fee’ law firms have taken to online advertising, specifically targeting backdated holiday pay claims – all after those lucrative class actions, ready to change their fortunate after the impact of the Employment Tribunal fees system. Employers simply cannot afford to take their eye off the ball on this. This is particularly prevalent to companies in sectors where a high percentage of staff earn part of their income on the basis of commission, shift allowances, regular overtime, or other bonus type payments which relate to an employee’s performance of their contract of employment.

Williams v British Airways

The issue first arose in a class action of around 2750 British Airways pilots that was heard by the Supreme Court in 2010. The case, known as Williams v British Airways, concerned a dispute over whether the pilots’ flying pay supplements and subsistence allowances, paid in addition to salary, should form part of holiday pay in order to be compliant with the Civil Aviation Working Time Directive. Whilst this piece of European legislation is sector specific, it has the same objective as the Working Time Directive, enacted into UK law by the Working Time Regulations 1998.

The matter was referred to the European Court of Justice (ECJ) on a series of points. The opinion of the ECJ was that all payments ‘intrinsically linked’ to an employee’s performance of the employment contract should be reflected in holiday pay. Thus providing an employee with normal or comparative pay whilst on leave, and not acting as a disincentive to take holiday. In the case of Williams, the flying pay supplement was found to be payable, whilst the subsistence allowance not.

Fast forward to summer 2014, when two further cases brought the holiday pay issue originally raised in Williams V British Airways firmly to a head.

Lock v British Gas

First was the case of Lock v British Gas Trading Ltd, heard before Leicester Employment Tribunal.  Whilst only a first instance decision, in this case, just as in Williams, a reference was made to the ECJ. The dispute concerned the effect that taking holiday had on Mr Lock’s income. Mr Lock was an energy salesman, with around 60% of his normal income made up of commission payments. When on holiday he would receive payments for previous commissions, as well as his basic salary. However, Mr Lock was prevented from earning commission whilst on holiday which led to a future reduction in earnings.

The ECJ applied the principle of ‘normal remuneration’ and confirmed that holiday pay should include both commission and salary (contrary to the 2003 Court of Appeal decision of Evan v Malley Organisation). With regards to Mr Lock’s specific circumstances, the Court confirmed that a future reduction in payment, as a result of the inability to earn commission whilst on holiday, was contrary to the objective of the Working Time Directive. Unfortunately, the ECJ refused to offer a formal answer on how ‘normal remuneration’ should be calculated, instead leaving the decision up to individual nation states to legislate accordingly. It did, however, suggest that a 12 month reference period would be the most appropriate.

Neal v Freightliner

The second case of note was that of Neal v Freightliner, which was due to be heard by the Employment Appeal Tribunal at the end of July 2014. The issue in the case concerned the payment of regular and predictable, although voluntary, overtime as part of holiday pay. The 2004 case of Bamsey V Albion had previously ruled that only contractual overtime, where there is mutuality of obligation, falls within the Employment Rights Act 1996 (ERA) definition of a weeks’ pay. The decision in Neal was that the voluntary overtime could form part of the calculation of a weeks’ pay for holiday pay purposes. This obviously raises several questions surrounding the on-going applicability of the ERA 1996’s definition of a weeks’ pay.

Unfortunately, the EAT never got to confirm its position with respect to Neal, as the case settled. However, other cases had been joined with the Neal case for the appeal, including the case of Bear Scotland v Fulton. These cases were heard in July, but judgment was reserved and is due any day now.

The ostrich approach is the wrong approach

Whilst some legal practitioners are advising clients to await this judgement before taking action, this issue is unlikely to go away given the previous ECJ involvement on the matter of holiday pay. This ostrich approach could prove to be an extremely expensive ticking time bomb. It will do little more than delay the obvious pain and expense, possibly increasing risk and cost. Whilst there is a potential defence available to non-public authority employers, this being that the Working Time Directive is not directly effective upon them, the predictive success rate of such a defence is low.

Inevitably there will be further judicial and legislative guidance on the correct calculation of a weeks’ pay for the purpose of holiday pay. However, there are several steps that prudent employers should be taking to measure, identify and mitigate risk. The extra sting in the holiday pay underpayment tail is that claims in the Employment Tribunal can be back dated to 1998, and claims in the County Court can be backed dated by six years. Whilst the time limitation for bringing a claim in the County Court (6 years from the date of the breach) is fairly immoveable, the three month limitation period in the Employment Tribunal (running from the date of the last underpayment), offers huge potential cost savings to the proactive employer.

Dealing with the problem

As a result of this, there are steps that all in-house HR professionals should consider undertaking:

  1. Work with your legal team, or payroll provider, to conduct a full audit of the scope of your holiday pay underpayments. This will enable you to properly identify the risk to your business. This will allow your management team to make fully informed, strategic decisions moving forward.
  2. Consider settling backdated holiday pay claims straight away. Taking the bull by the horns, in the approach infamously undertaken by the John Lewis Partnership, has several potential benefits. Whilst initially costly, such an approach removes ongoing liability and avoids future costs of litigation, both in terms of time and legal fees. It is also likely to have a significantly positive impact on staff morale.
  3. Increase holiday payments before the message of ‘no win, no fee’ holiday pay litigation becomes wide spread.  With time limits so tight in the Employment Tribunal, a change now could cut the chain of liability offering a huge cost saving for employers. Whilst this will do little to cut the chain in respect of County Court claims, far fewer claimant legal services providers will be offering litigation in the County Court as an avenue to their clients.
  4. Consider adopting a new payment method for holiday pay that circumvents the need to increase payments going forward. There are several suggestions within the legal arena as to how this can be achieved. One suggested method involves a pro-rata reduction in overtime, commission and benefits; another is the rolling up of such earnings and then deferring payment until after annual leave is taken. The jury is still out on whether any of these methods will actually achieve their aims. A pro-rata reduction of commission/overtime/bonuses will likely require timely and expensive consultations with staff, and carries with it a risk of satellite litigation. The rolling-up deferred payment method’s success will be contingent on the final legal determination of how a weeks’ pay is to be calculated.

However an employer seeks to approach the problem, the message is clear. Be proactive. Do not wait. This issue may have dropped off the HR agenda slightly, but it isn’t going away. At the very least, HR professionals should ensure they are properly informed of scale of the financial risks. Once they have the right information, prudent legal advice can be sought on the best way to attempt to mitigate risk.

Emma Renke is an experienced employment law litigator who heads up MidlandHR’s employment law consultancy team, for more information contact [email protected]