Articles - Paying Holiday Pay Properly

Employment & Discrimination -

The judgment of the EAT (Langstaff J) in the combined appeals of Hertel (UK) Ltd v Woods & Others, AMEC Group Ltd v Law & Others and Bear Scotland Ltd & Others v Fulton & Others (UKEAT/0160/14, UKEAT/0161/14, UKEATS/00047/13), resolves several important questions regarding the calculation of paid annual leave under the Working Time Regulations 1998 (‘WTR’) and the Working Time Directive (‘the Directive’).

The media described the judgment as ‘ground-breaking’ for good reason. It is thought to affect around five million workers in the UK and within hours the government announced that it would set up a task force to ‘assess the possible impact of the ruling’ and ‘to discuss how we can limit the impact on business’.

Contrary to many media reports the case was not about ‘voluntary overtime’. In each appeal the workers were required to work overtime and normally worked overtime, although that overtime was not guaranteed. The arrangement might be called ‘non-guaranteed overtime’ but, as the EAT observed, the description ‘voluntary overtime’ is misleading where workers are contractually obliged to carry it out. The employers paid annual leave at the basic contractual rate only. Nothing was paid for overtime in respect of the four-week period of holiday guaranteed by WTR, implementing the right in Article 7 of the Directive.

In 2004 the CA in Bamsey and Others v Albon Engineering and Manufacturing plc [2004] ICR 1083 decided that compulsory, but not guaranteed, overtime did not need to be taken into account for the purposes of paid annual leave under WTR because the formula for calculating ‘a week’s pay’ in ERA 1996 should be applied without reference to the Directive. The CA assumed that the Directive was silent as to the level of pay for annual leave. Since then, in Case C-155/10 British Airways v British Airways v Williams [2012] ICR 847, CJEU, [2012] ICR 1375, SC and Case C-539/12 Lock v British Gas Trading Ltd [2014] ICR 813, CJEU, the Court of Justice ruled that workers are entitled to their normal remuneration in respect of the period of annual leave guaranteed by the Directive. The right in Article 7 is directly effective against an emanation of the state (see Case C-282/10 Dominguez [2012] IRLR 321, CJEU) but it remained unclear how those developments applied to the interpretation of WTR, of particular relevance to the private sector.

The EAT decided four issues of general application. A fifth issue was specific to the contracts of the workers in Wood v Hertel and is not considered in this article.

(1) Requirements of Article 7 of the Directive
Accepting the argument for the workers and rejecting the submissions of the employers and BIS, the EAT held that the judgments in Williams and Lock were clear. The argument that overtime pay only affected holiday pay if the employer was obliged to offer overtime was expressly rejected.

Under Article 7, normal pay had to be paid in respect of annual leave, in accordance with ILO Convention C-132. There was no difficulty in identifying ‘normal’ pay for the purposes of EU law, it was that which was normally received. Where there was no ‘normal’ remuneration an average taken over a reference period determined by the Member State was appropriate. The overtime was required by the employers and regularly worked by the workers. Overtime pay was therefore remuneration which had to be paid in respect of annual leave. Contrary to the submissions of BIS, there was no scope for uncertainty about the meaning of Article 7 and therefore no reference to the Court of Justice was necessary.

(2) Payments for travelling time
‘Radius allowance’ was paid for daily travel between home and a site more than 8 miles away. It was for travelling time and fares and was payable only if a full day was worked. Only the taxable element was claimed. One employee also received ‘travelling time payments’. Both types of payment related to time spent travelling in connection with work. Time spent travelling was not an expense ancillary to travel like a bus fare. Following Williams and Lock both types of payment formed part of normal remuneration and should be reflected in holiday pay.

(3) Interpretation of the Working Time Regulations 1998
A critical issue, of major importance in the private sector, was whether WTR could be interpreted to achieve the result required by the Directive. It was argued on behalf of the workers that it could. While BIS conceded that a conforming interpretation was possible if required by the Directive, the employers argued that such an interpretation would go beyond the limits of the interpretative obligation considered by the ECJ in cases such as Marleasing (1992) 1 CMLR 305, ECJ and Pfeiffer [2005] ICR 1359, ECJ. They argued that the Marleasing principle required a narrower approach than that applicable to s.3 HRA 1998 and considered in Ghaidan v Godin-Mendoza [2004] UKHL 30, [2004] 2 AC 557, HL. In any event, the employers argued that a conforming interpretation would ‘go against the grain’ of WTR and enter the realm of legislation rather than interpretation. For those reasons it was argued that a conforming interpretation would run contrary to Ghaidan principles, if applicable.

The EAT held that the domestic legislation could be given the conforming interpretation necessary to give effect to the requirements of Article 7. The interpretative obligation required by Pfeiffer in relation to EU legislation was no narrower than that required under s.3 HRA 1998. WTR were passed to implement the Directive. A conforming interpretation did not ‘go against the grain’ of WTR, which was that annual leave should be paid. The fundamental premise of Bamsey that Article 7 laid down no requirements as to payments for annual leave was now wrong. Bamsey demonstrated the correct interpretation of WTR if untrammelled by EU law, but it did not identify a cardinal feature, guiding purpose or ‘grain’ of the legislation which would preclude a different interpretation. While the precise wording did not matter, words could be read into regulation 16(3)(d) WTR to ensure that overtime payments were maintained in respect of annual leave.

The EAT was comfortable that neither the principle of legal certainty nor that of non-retrospectivity had a bearing on the construction to be adopted. It was not a case where there was no legislation at the relevant time providing for liabilities first identified much later, nor was Williams a ruling of a wholly exceptional sort.

(4) Arrears and series of deductions
In Revenue and Customs Commissioners v Stringer [2009] ICR 985 the House of Lords held that a claim for holiday pay could be brought as a claim for unlawful deductions from wages under s.23 ERA 1996. In relation to arrears, the argument is therefore that on each occasion holiday was not paid in accordance with Article 7 and regulation 13 WTR the deduction was one of a series of similar deductions for the purposes of s.23(3) ERA 1996.

The appeals in Hertel and AMEC explored the limits of that argument. On behalf of the workers it was argued that ‘series’ is a term of ordinary usage, capable of covering events of a similar type. Payments made on a Tuesday of each week were no less a series because a similar payment was not made on any intervening day.

In a novel development of the law the EAT held that the legislative context meant that if a series was punctuated by a gap of more than three months it was broken by passage of time. Parliament had not intended that jurisdiction could be regained simply because a later underpayment, occurring more than three months later, could be characterised as having such similar features that it formed part of the same series. Underpayments prior to such a gap would therefore be out of time, subject to any argument that it had not been reasonably practicable to bring the complaint within three months.

Comment
The EAT judgment, which may be the subject of further appeals, is important for many thousands of claims already lodged across the UK and to around 5 million workers according to government figures. It confirms that holiday pay must include all elements of normal remuneration and that tribunals can and should interpret WTR to achieve that result. The means of interpretation is not especially important. What matters is that workers receive their normal remuneration, as clarified by Williams and Lock, in respect of the 4-week entitlement in Article 7 of the Directive and regulation 13 WTR.

The point on unlawful deductions means that, for the moment at least, claims for arrears will be of limited scope. It also creates a practical difficulty because claims may now need to be lodged repeatedly in order to avoid limitation problems. That would be a headache for workers and employers alike given the need to pay tribunal fees, fees for which the employer will be liable if the claims succeed. Workers will argue not only that a just application of r.76(4) of the ET Rules of Procedure should lead to that result, but also that it is necessary to ensure full compensation for breach of an EU right in accordance with Marshall (No.2) v Southampton & South West Hampshire AHA [1993] ICR 893, ECJ. Parties might therefore wish to agree, with the endorsement of a tribunal, rolling three month amendments in order to avoid a steadily increasing liability for tribunal fees and the need to engage in early conciliation every three months. Prakash v Wolverhampton City Council UKEAT/0140/06/MAA demonstrates that it is quite possible to amend to add new claims arising after presentation of the original claim.

There is probably still some scope for argument over what constitutes ‘normal remuneration’ in particular cases, although the combined effect of Williams, Lock and now Hertel and AMEC is to provide some very clear signposts. Nevertheless, some commentators have suggested that the EAT’s reasoning has no application to overtime properly described as ‘voluntary’, i.e. overtime that the employer is not obliged to offer and that the worker is not obliged to do if offered. The number of workers affected is such that this is likely to be explored in other litigation very soon.

That would be a bold argument. Once an offer of voluntary overtime is accepted, is it really arguable that work is somehow done on a non-contractual basis? Would the employee be free to leave during the overtime shift or not to turn up at all? Even more clearly, once a worker has worked overtime the reason he is paid is because he has performed contractual duties – see Lock. How would the commentators who suggest that truly voluntary overtime should not be included in holiday pay rationalise the position of piece workers, or of those on ‘zero hours’ contracts? Overall, is it really arguable that payments for voluntary overtime lack the necessary ‘direct link’ to the performance of tasks required under the contract of employment? The better view is surely that payments for voluntary overtime are also part of ‘normal remuneration’ and should therefore be reflected in the rate of holiday pay in accordance with ILO Convention C-132, which has been repeatedly referred to by the ECJ in cases on paid annual leave. Pay received during a holiday should be a continuation of the pay received before it began.

Finally, one obvious but important point. The EAT in Hertel and AMEC was concerned with the 4 weeks’ paid annual leave granted by Article 7 of the Directive and regulation 13 WTR. The additional 1.6 weeks granted by regulation 13A remain subject to the decision Bamsey, and any longer period of contractual leave is subject to contractual rather than statutory rules.

Mark Whitcombe was junior counsel for the employees in the Hertel and Amec appeals (and also the settled Freightliner appeal referred to in paragraph 2 of Langstaff J’s judgment). He was led in all three appeals by Michael Ford QC. Both are members of Old Square Chambers.

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