Holiday pay: what constitutes a break in a ‘series of deductions’?

30 May, 2017
by: Cripps Pemberton Greenish

In the recent matter of Fulton v Bear Scotland the EAT considered, in relation to holiday pay, whether a gap of three months between non-payment or underpayment of wages (in effect underpaid holiday pay) breaks the ‘series of deductions’, therefore limiting an employer’s exposure.

Background

The primary purpose of the Working Time Directive is to protect the health of employees. It does this by restricting the hours that employees are able to work, such as requiring rest breaks and rest periods, and giving employees the right to a minimum annual leave entitlement.

Back in 2011 (Williams v British Airways) and 2014 (Lock v British Gas) respectively the European courts acknowledged and established that if an employee’s normal remuneration included certain commission, overtime payments, and other allowances, then these are to be included in the employee’s holiday pay – otherwise the employee might be deterred from taking annual leave, which goes against the aim of the Directive.

Bear Scotland v Fulton 2014 EAT

In November 2014 the EAT confirmed in the case of Bear Scotland v Fulton that the UK’s Working Time Regulations could be read to conform with the Working Time Directive. The EAT determined that the ‘normal remuneration’ principle applied in the UK and that three months between an underpayment of holiday pay broke the ‘series of deductions.’ The case was passed back to the employment tribunal to apply the law to the facts of the case.

At the time the decision caused some concern for employers, with the potential for claims for a ‘series of deductions’ going back multiple years. However, shortly after the above decision a cap of two years was imposed on back pay in unlawful deduction from wages claims.

Fulton v Bear Scotland 2016 EAT- Break of three months?

The employment tribunal stated it was bound by the decision of the EAT and excluded any claims where more than three months had passed between successive failures to make the correct holiday pay. The claimants appealed arguing that on this point the EAT had been making a suggestion rather than it being material to the decision.

Providing clarity, the EAT disagreed and confirmed that a gap of three months would break the ‘series of deductions’ meaning a tribunal could not consider earlier underpayments.

What does this means for employers?

The decision is good news for employers and limits their exposure to claims.

Further, case law and the position of the courts has been that the requirement for holiday pay to be calculated on ‘normal remuneration’ is limited to the minimum 20 days under the Working Time Directive (as set out and implemented by regulation 13 of the Working Time Regulations) rather than the statutory minimum of 28 days under the Working Time Regulations (regulation 13A of the Working Time Regulations provides for the additional statutory entitlement of 1.6 weeks/8 days).

On the basis that employers have the right to direct when an employee can take leave it follows that employers can determine when the 20 days under the Working Time Directive are taken.

Some employers include a clause in their employment contract, or a section in their holiday policy, expressly stating that the first four weeks of annual leave taken in any holiday year shall be deemed to be the leave derived from the Working Time Directive (regulation 13 of the Working Time Regulations).

Therefore, the likelihood of there being a gap of 3 months (and a break in the ‘series of deductions’) between the last of the first 20 days of annual leave taken in one holiday year and the first day of annual leave in the following holiday year could be quite high.