What has struck me most about some of the commentary on the EAT decision in Bear Scotland Ltd v Fulton (and other cases) on overtime and holiday pay has been the way in which it is assumed that the exclusion of overtime from holiday pay is perfectly natural and logical and its inclusion is a surprising and strange requirement imposed by Europe. Take this comment from Adam Marshall of the British Chambers of Commerce, as quoted in the Telegraph:
“This expanded definition of ‘pay’ is so ludicrous that the government itself has argued against it. No business should have to pay more than base salary during holiday periods, unless they elect to do so,”
Or look at what the Independent quotes John Cridland of the CBI as saying:
“This is a real blow to UK businesses now facing the prospect of punitive costs possibly running into billions of pounds – not all will survive, which could mean significant job losses.”
Punitive? As in ‘inflicted or intended as punishment’? Really?
The truth is that it is the exclusion of overtime that is difficult to justify rather than its inclusion. The problem has been caused by the way in which the Working Time Regulations adopted a definition of a ‘week’s pay’ that was never designed to be used in this context.
Government lawyers do not like reinventing the wheel. So when faced with having to include a right to paid annual leave in the Working Time Regulations 1998 they were happy to use the existing definition of a week’s pay set out in the Employment Rights Act 1996. For those who haven’t already had to – have a go at actually reading those provisions. The meaning doesn’t exactly leap out at you does it? The drafting is hardly a model of simplicity and clarity.
‘Week’s pay’ – a potted history
This definition has been through the mill a few times. The current version is derived from the Employment Protection (Consolidation) Act 1978, which in turn took it from the Employment Protection Act 1975 (schedule 4 for the enthusiasts amongst you). However it has its origins in the Contracts of Employment Act 1963, which first introduced a right to a minimum period of notice. Schedule 2 of the Act provided that an employee was entitled to be paid during the notice period if he or she was off sick, not provided with work or absent on contractual leave.
The schedule divided employees up into those with and those without ‘normal working hours’. Those without were entitled to be paid based on a 12 week average and those with normal working hours were paid the amount they would have received had they worked those hours (with another averaging provision for piece workers). That is pretty much the same method of calculation we find in the Employment Rights Act today
Paragraph 1 of the schedule specified that those who earned overtime pay when employed for more than a fixed number of hours in a week were to be treated as having normal working hours. It then provided that those normal hours should be taken as excluding hours of overtime unless they were actually part of the minimum number of hours the employee was required to work. The effect of that was to ensure that an employee who had been dismissed or had resigned – and was in his or her period of minimum statutory notice – would only be paid basic pay, excluding overtime, in any week when he or she was not offered work, was absent, or was taking contractual leave.
Paragraph 1 is now to be found, with only minor amendments, in s.234 of the Employment Rights Act 1996. When the Government used the existing definition of a week’s pay when implementing the Working Time Regulations, therefore, it also incorporated this provision, designed to be used only as the employment relationship was ending.
The exclusion of overtime when calculating holiday pay is therefore based on an archaic definition of a week’s pay which was intended to apply to a completely different set of circumstances more than half a century ago. While it makes perfect sense to limit the pay of an employee who has already been given notice and is not working, it makes very little sense to apply the same limitation to holiday pay while the relationship is alive and ongoing.
No point acting all surprised about it
But even if you don’t accept that, it is the Government’s job to implement directives properly and the need to amend the law has been apparent since the Williams v British Airways decision in 2011. In fact we can probably say that the need to reexamine the definition of a week’s pay was made clear by the ECJ in the Robinson Steele case back in 2006 where the court said:
49. The holiday pay required by Article 7(1) of the directive is intended to enable the worker actually to take the leave to which he is entitled.
50 The term ‘paid annual leave’ in that provision means that, for the duration of annual leave within the meaning of the directive, remuneration must be maintained. In other words, workers must receive their normal remuneration for that period of rest.
By any sensible definition, if an employee normally receives basic pay plus overtime then his or her normal remuneration must include overtime. As Mr Justice Langstaff says in the Bear Scotland case:
44. Despite the subtlety of many of the arguments, the essential points seem relatively simple to me. “Normal Pay” is that which is normally received.
So there is nothing ludicrous in the EAT deciding that overtime needs to be included in the calculation of holiday pay. Employers should instead be grateful that the EAT found such a creative way to prevent employees who have been underpaid in terms of holiday pay for the past 16 years from claiming back pay (that’s a whole other article). What would be ludicrous however would be to leave the current definition of a week’s pay in place and just expect employers to read up on the case law.
Vince Cable, it seems, has set up a task force to look at how to limit the impact of the decision. There isn’t much that can be done to be honest. I know hardly anyone who thinks that the EAT was actually wrong in the way in which it interpreted the directive and an appeal on that point is highly unlikely to succeed. Short of renouncing the Working Time Directive and leaving the EU altogether (that’s an issue for next year) we are stuck with including overtime in holiday pay. What the task force can usefully do, however, is look at a new definition of a week’s pay that can be clearly understood and which complies with the directive. How hard can that be?