What did we get up to last month?
We've been eagerly waiting for the Employment Appeals Tribunal (EAT) judgment of the year and now its here! You will not have missed the news reports of workers' "new" entitlement to receive paid overtime as part of their holiday pay. So, what are the facts?
In three combined holiday pay cases, the EAT was tasked with deciding whether or not pay received by workers for working compulsory (but not guaranteed) overtime should have been included in the employers' calculations when working out how much to pay each worker while they were on annual leave. The same question arose in relation to certain allowances routinely paid to workers, in this case travel allowances.
It is a surprise to many that the straightforward question of what workers should be paid while on holiday had still not been answered, despite the relevant legislation (the Working Time Regulations (WTR)) coming into force in 1998, some 16 years ago. However, until 2012 everyone thought that the question had already been answered – holiday would be calculated with reference to basic salary and guaranteed overtime only. This settled principle was called into question in 2012 when the Court of Justice of the European Union confirmed, in a case brought against British Airways by its pilots, that a worker must not be at a financial disadvantage as a result of taking holiday since this would act to deter people from taking time off, which is essential to their health and wellbeing. Instead, workers must receive their "normal" pay when on annual leave.
This judgment has led to a number of claims being brought in the Employment Tribunals over the course of the last 2 years, with workers claiming that their "normal" remuneration incorporates all sorts of payments over and above basic salary and guaranteed overtime, namely commission, non-guaranteed overtime and allowances. This EAT judgment is the first binding ruling on these issues.
So what did the EAT decide? It held that the compulsory paid overtime should have formed part of the workers' holiday pay. It also confirmed that the travel allowances in question should also be included in the workers' holiday pay. Its reasoning for this is relatively straightforward: the workers normally received overtime pay and the allowances when at work; those payments therefore formed part of their "normal" pay.
Does this ruling apply to all holiday that a worker takes? Actually, no. It is only the 4 weeks minimum paid holiday allowances that the European Directive says that workers are entitled to which is covered by this ruling. The WTR – which is UK legislation that implements the European Directive – is more generous than the Directive in allowing a minimum period of leave of 5.6 weeks. The additional 1.6 weeks does not have to be paid in accordance with the European interpretation of "normal remuneration". Therefore, as long as workers are receiving holiday pay inclusive of all normal earnings for 4 weeks per year, their remaining leave can be paid at a lower rate (as long as it complies with the WTR and the terms of the workers' contracts of course).
What about claiming for past holidays which have not been paid at the workers' "normal" remuneration? Well, workers can claim for holiday underpayments by bringing a claim for unlawful deductions from wages. In theory, these claims could go back as far as 1998 (when the WTR became law) since routine underpayments of holiday could be considered to be a "series of deductions" – a worker is able to bring a claim in respect of a series of deductions within 3 months of the most recent deduction. However in practice, the EAT in a novel approach has sought to restrict the scope for workers to claim for a series of deductions as far back as 1998. In the EAT's judgment, where there is a gap of 3 months or more between deductions, the earlier deductions fall away permanently and cannot be claimed: essentially, if there is a 3 month gap the series is broken and cannot be revived by a later deduction. Whilst on the face of it this would prevent workers from being able to claim back pay for long periods of time, this article by Cloisters chambers explains that the application of this new 3 month rule is not as simple as it sounds. What a headache! In any event, it is almost certain that this point will be appealed given that it is a new approach to the question of what constitutes a series of deductions. It is likely to be yet another case of "watch this space" to be able to really consider the impact of this ruling.
The judgment certainly will have an immediate impact on employers. It is important that businesses revisit their holiday pay calculations and carry out a full review as a matter of priority in order to identify what remuneration a worker normally receives when attending work.
It will then be important to ensure that, with immediate effect, at least 4 weeks’ holiday each year is paid in accordance with this EAT ruling. We think it would be sensible to identify which 4 weeks will be paid at the higher rate in workers’ contracts so that there is certainty as to which periods of annual leave are to be paid at which rate (unless there is an intention to pay all contractual leave at the same, higher rate). Employers should bear in mind that the sooner correct holiday is paid, the sooner the 3 month deadline will start ticking to break the series of deductions in relation to underpaid holiday taken previously (subject to a successful appeal on this point and the complications referred to above).
Contracts and handbooks should also be reviewed to assess whether or not changes need to be made to holiday pay provisions so that they comply with the EAT ruling.
Employers may also wish to carry out a review of holiday taken by workers in previous years and the amount paid to them during this leave when compared with the amount which should have been paid to them in order to assess potential liability for unlawful deductions from wages claims.
If you have any questions at all in relation to this judgment please do contact me or another member of the team.
Any new cases to be aware of?
In Coventry University v Mian, the Court of Appeal held that the University did not breach its duty of care to Dr Mian when it decided to bring disciplinary proceedings against her in relation to allegations turned out to be false. Although Dr Mian was cleared of the charges against her, she resigned and claimed constructive dismissal on the basis that the University should have known that the allegations were false and had breached their duty towards her when proceeding with a meritless disciplinary process.
The Court of Appeal determined that the University had carried out a reasonable investigation and had acted reasonably in holding a disciplinary hearing. It was only with the benefit of hindsight that it appeared obvious that the allegations were false. Given that the investigation had uncovered details which, when objectively assessed, warranted scrutiny at a disciplinary hearing, the employer had not acted negligently or in breach of its duty towards Dr Mian when carrying out a disciplinary hearing.
In General Dynamics Information Technology v Carranza, the EAT overturned an Employment Tribunal finding that Mr Carranza had been discriminated against and unfairly dismissed when his employment was terminated for recurrent sickness absence, 90% of which was due to his disability. The EAT held that GDIT had not failed in its duty to make reasonable adjustments by declining to ignore a final written warning that had been given for previous absences. Nor was the dismissal unfair on the basis that GDIT had failed to reconsider whether or not the final written warning had been fairly given when it dismissed Mr Carranza. There was no reason to suspect that the final written warning had been manifestly inappropriate or given in bad faith and on that basis it could safely be relied upon by GDIT when making the decision to dismiss.
