How does the holiday pay decision affect recruiters and umbrella companies?

Written on 4 Nov 2014

The President of the Employment Appeal Tribunal handed down judgment in AMEC Group Ltd v Law and related appeals, which are some of the holiday pay test cases that the Government, private sector, unions and employment lawyers have been watching closely.

The cases in which judgment were given this morning concerned “non-guaranteed” overtime. “Non-guaranteed” overtime is where the employer is under no obligation to offer overtime to employees, but where it does so, the employee is obliged to perform it and gets paid for it. However, arguably the EAT decision does not rule out the potential for some voluntary overtime arrangements to impact on holiday pay where in fact in reality a worker considers they must accept regular overtime offered by their employer. Less clear will be the case of a worker who has a regular pattern of working overtime to increase his or her normal remuneration albeit there is genuinely no obligation from the employer on him to do so.

The judgment does give strong clues as to how similar claims (relating to commission and bonus) might be decided, which are of course highly relevant to recruitment companies and umbrella companies.

The EAT’s key conclusions are as follows:

  1. The EAT’s ruling applies in relation to the holiday granted by EU law (i.e. 20 days for a full time worker, not the additional UK entitlement to 28 days). There are arguments, but no definitive answer, to suggest that the first 20 days holiday are EU designated and the following 8 fall outside this. In other words any right to higher holiday pay may only be for the first 20 days of holiday per year.
  2. Article 7 of the Working Time Directive requires workers to be paid “normal remuneration”. “Normal remuneration” means their typical average pay, not just the basic hours’ pay, and therefore should include non-guaranteed overtime pay. This mean a large number of UK workers have not been paid the correct amount of holiday pay.
  3. A worker can bring a holiday pay claim for “a series of unlawful deduction of wages” going back to when their employment commenced. However, the EAT has sought to limit the effect of this claim by stating that if there is a gap of more than three months between any alleged deductions, the chain is broken and there is no longer a “series of deductions”. This means that the Employment Tribunal loses jurisdiction to hear claims for the earlier deductions and some employers may decide to calculate payment correctly form now on in an attempt to break the chain. The EAT has also stated that workers are not entitled to retrospectively designate which holiday was “EU” holiday under regulation 13 of the WTR and which was additional UK holiday so as to create an unbroken “series”. This will therefore restrict the ability for workers to bring retrospective claims for underpaid holiday pay and is likely to be a point of appeal.

The EAT did not clarify whether an employee can bring a breach of contract claim in the high court/county court for holiday pay (the limitation period of which is six years) so that is still unknown.

What does this mean for commission payments paid by recruiters?

  • The decision in the commission test case is due in February, however, given this decision was given by the President of the EAT it is likely to be very influential. It looks likely that commission that is “settled” and “regular” and “normally received” by a worker will fall within the meaning of “normal remuneration”.
  • This would mean that recruitment consultants whose pay “normally” includes commission may have retrospective claims. The attempt by the EAT to limit the scope of “a series of unlawful deduction of wages” claims will be of little comfort for recruiters having monthly and quarterly commission schemes.
  • In addition, umbrella workers whose pay normally includes any element of bonus or commission or overtime may have retrospective claims.

Going forward it is likely that employers, including recruitment companies and umbrella companies, may need to make sure that holiday pay is paid at a rate which covers any bonus or commission or overtime normally paid to break the chain of causation. This may involve changes to current contracts and practices, and a careful review of how to best deal with the risk of retrospective claims (for which there are various options).

We suspect the parties may likely appeal the decision to the Court of Appeal so the saga is probably not over. In addition, Business Secretary Vince Cable has announced he is setting up a new taskforce to assess the impact of the ruling.