Calculating Holiday Pay – “Lock” down what you should be paying

In recent conjoined UK Tribunal cases (Bear Scotland Limited v Fulton, Hertel (UK) Ltd v Woods and SM and Amec Group Ltd v Laws) (the "UK Cases") the Tribunal held that the European Union Working Time Directive (the "Directive") requires that pay for required non-guaranteed overtime work should be used in calculating holiday pay entitlement. This means that an employee's entitlement to pay while on holidays should be calculated to include certain overtime work and not be limited to the employee's basic pay.

This decision is at odds with the express provisions of Irish legislation on this point. In Ireland, the Organisation of Working Time (Determination of Pay for Holidays) Regulations, 1997 (the "Regulations") provide that the calculation of holiday pay includes payment for “regular allowances or bonuses”. However, the Regulations expressly exclude "any pay for overtime". So, the question now is to what extent are employers in Ireland obliged to follow the European Union position? Should employers fall in line or should they "wait and see"? 

What has Europe said about this?
In the case of British Airways v Williams, the Court of Justice of the European Union (the "CJEU") held that "paid annual leave" within the meaning of the Directive means that "for the duration of "annual leave" remuneration must be maintained…workers must receive their normal remuneration for that period of rest".

Most recently, in the case of Z.J.R Lock v British Gas Trading Limited, the CJEU confirmed that the definition of holiday pay can no longer be based on basic salary only where the worker's normal remuneration includes commission based on sales. Here, the CJEU found that holiday pay must also include any other payments that are “intrinsically linked to the performance of the tasks…and in respect of which a monetary amount is provided and included in the calculation of the worker's total remuneration". So, the CJEU concluded that national UK legislation, which required holiday pay calculation to be based exclusively on basic salary, was incompatible with the Directive.  

Why?
Significantly, the CJEU recognised that a "financial disadvantage" when taking statutory annual leave may mean that the worker may be "deterred from exercising his right to annual leave" which would be contrary to the Directive's objective to protect the health and safety of workers. For that reason, the CJEU has interpreted the meaning of "pay" to include commission.

What are they doing in the UK?
The UK Cases involved employees paid principally on a commission basis. The UK Tribunal noted that the CJEU decisions were "of the highest authority". Accordingly, the Tribunal held that the Directive requires that pay for required non-guaranteed overtime work should be used in calculating holiday pay entitlement. This decision was limited to statutory holidays only and its retrospective scope capped at 3 months.

Recognising the potential cost implications for businesses, the UK has set up a task force to look at how this decision should be implemented. The reaction from employers in the UK has been mixed. Risk averse employers are auditing their business to assess what portion of their workforce work regular and frequent overtime in order to factor this into holiday pay calculations. On the other hand, given that the case is subject to appeal, some employers are adopting a "wait and see approach" pending more clarification on the issue.

Now What?
The Irish Regulations expressly exclude "any pay for overtime" and, consequently, are at odds with the position as articulated by the CJEU and UK Tribunal. The position is that Irish courts are required to construe national legislation which implements European Union law (in this case the Irish Regulations) in accordance with European Union law (in this instance the EU Directive). On this assumption, it would seem likely that Ireland will be required to interpret the Regulations in line with the Directive and the CJEU's interpretation of that Directive in Lock, notwithstanding that the Regulations provide otherwise.

It is likely that Irish State bodies and State agencies will be bound by Lock on the basis that they are ‘emanations of the State’ and as such, are expected to give effect to the European law position by virtue of the vertical doctrine of direct effect, notwithstanding that this position contradicts the provisions of the Irish Regulations. The position for private employers is less clear, however, as the doctrine of direct effect does not apply horizontally. The prudent view is that private employers should be falling in to line with the direction given by the CJEU. The reality is, however, that many employers are taking a "wait and see" approach.

By way of relevant analogy, the CJEU decisions in Stringer/Schultz Hoff confirmed that the entitlement to annual leave cannot be affected while the employee is on sick leave. This position is contrary to the current Irish law position set out in the Organisation of Working Time Act 1997 (the "OWT Act"). However, following a European Union Commission Letter of Formal Notice to Ireland, the Irish Government is now amending the OWT Act to bring it in line with the Directive. It is very likely that a similar approach can and will be taken in relation to the disparity between Lock and the Regulations. Employers should certainly sit up and take notice of this development and should, at the very least, be ready to implement the Regulations if and when they are amended to address this disconnect between Irish law and European law.

Another interesting question which arises from the decisions is what type of payment is caught under the definition of holiday pay. The Bear decision addressed only "non-guaranteed overtime", that is, circumstances where an employer is not obliged to provide the overtime but the worker is obliged to work it if requested. The situation in relation to the more common "voluntary" overtime, where a worker can choose whether to work it and there is no obligation on the employer to provide it, is less clear and no definitive conclusion was reached on this type of overtime. 

And what is the "look back" period? Are Irish employers now potentially on the hook for holiday pay dating back to the commencement of the Directive? In terms of retrospective effect, it is unclear whether the impact of the CJEU decision in Lock was potentially intended to go back as far as the introduction of the Directive. On one view such a lengthy limitation period is only a remote possibility and Ireland may be more likely to look at its existing limitation periods under the Payment of Wages Act 1991 (maximum 12 months) and the OWT Act (maximum 18 months) in terms of assessing potential exposure for unlawful deductions. 

There is a fork in the path for Irish employers. A "wait and see" approach can be adopted until a suitable test case presents itself at which point the Irish position will be more certain and a change to current practices for calculation of holiday pay may be more clearly necessitated. However, this approach may run the risk of a lengthy bill for back-dated holiday pay shortfalls. In addition, notwithstanding the content of Ireland's current law, employers are not immune from employee grievances or even industrial relations action to seek to have the CJEU position implemented in Ireland sooner rather than later.

An alternative approach would be to proceed in accordance with Lock and calculate holiday pay to include payments that are intrinsically linked to employees' performance. While this approach is the most risk averse, it comes with a health warning that, in addition to being potentially premature, in applying the CJEU approach, an employer may open Pandora's box and alert employees to the possibility of seeking payment in respect of previous holidays that did not factor in overtime/commission payments that may now, arguably, be owed. 

In any event, we recommend that a prudent employer: 

• Take advice in relation to their particular circumstances
• Audit the different overtime payments made to workers
• Review whether any overtime is frequent or regular
• Review contracts and handbooks to accurately reflect how holiday pay is calculated

For further information please contact Karen Killalea or Ailbhe Dennehy.

Date published: 12 January 2015