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EAT says holidays must be paid at average earnings but gives hope to employers on claims for back pay

David Reid
4th Nov 2014

The long-awaited Employment Appeal Tribunal (EAT) decision on whether overtime earnings must be included in the calculation of holiday pay has been handed down this morning.

 

While the headlines in national news media are concentrating on the widely expected conclusion that employers must include overtime earnings in holiday pay calculations, the judgment does go on to give hope to employers concerned about massive liabilities for back pay that it may be more difficult for employees to claim several years’ back holiday pay than was generally expected.

 

Firstly, the EAT found that overtime worked must be included in the calculation of holiday pay for holidays taken under the European Working Time Directive. Under the Directive, employees are entitled to a minimum of four weeks’ paid holidays per annum.

 

Secondly, the EAT said that the UK Working Time Regulations can and must be interpreted in such a way as to give proper effect to the Directive. That means the formula for paying holiday pay contained in the Employment Rights Act 1996 must be read in such a way as to require holiday pay to include overtime earnings.

 

Thirdly, and perhaps most importantly for employers concerned about claims for back pay going back to the implementation of the Working Time Regulations in 1998, the EAT found that where there was a gap of more than three months between one Working Time Directive holiday and the next one, this broke the ‘series’ of unlawful deductions from wages and made underpayments of holiday pay prior to that gap time-barred unless the employee can show that it was not reasonably practicable to bring the claims earlier.

 

The significance of the third point is increased by the finding that the right to have overtime included in holiday pay calculations only applies to the minimum four weeks’ paid holiday under the Directive and not to the additional 1.6 weeks’ paid holiday due under the UK Working Time Regulations. The EAT also found that in the absence of a contractual agreement to the contrary, it is presumed that employees take their Working Time Directive four weeks first, and then their Working Time Regulations 1.6 weeks thereafter.

 

This might mean, taking the example of an employee who works five days per week, that if there is a gap of more than three months between the first day of holiday in the current holiday year and the 20th day of holiday they took in the previous holiday year, any claim for back pay will be limited to the current holiday year only.

 

Fourthly, the EAT found that payments for time spent travelling to and from work also require to be included when calculating Working Time Directive holiday pay.

 

The much-anticipated judgment does, however, leave a couple of very important questions unanswered:

 

  • We still don’t know whether any contractual limitation period (five years in Scotland and six years in England) will apply in respect of claims that are not time-barred.
  • Nor do we know whether the formula in the Employment Rights Act for calculating average-earnings holiday pay, by taking an average of the previous 12 weeks’ earnings, is the only permissible method for UK employers to calculate Working Time Directive holiday pay.

 

It is also unclear whether employees will be able to circumvent any time-bar issues at the Employment Tribunal by bringing their claims in the civil courts, although many commentators have expressed serious doubts about the viability of civil claims.

 

Finally, and perhaps more significantly, leave to appeal to the Court of Appeal has been granted to both parties on all of the above rulings. This means that it may be some considerable time yet before we have any legal certainty on the issue. It may very well also mean that Employment Tribunals will hold all existing claims for back holiday pay in abeyance until all avenues of appeal have been exhausted in this case.

 

You can read the judgment here.

 

Read our expert comments here.

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