The EAT has dismissed an appeal challenging the rule that a "series of deductions" in an unlawful deductions from wages claim will be broken by gaps of three months or more.
The EAT held that the rule is a binding authority and should be followed by Tribunals. This decision will provide comfort to employers facing claims for underpaid holiday pay, or other types of unlawful deductions from wages claims (Fulton and another v Bear Scotland Ltd (No.2)).
Back in 2014, in the case of Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, Amec Group Limited v Law and others (Bear Scotland No. 1), the EAT held that:
- Payments made in respect of overtime that an employee was obliged to work, but the employer was not obliged to offer, must be included in the calculation of holiday pay.
- The Working Time Regulations 1998 were capable of being interpreted so as to give effect to this requirement.
- Employees could only bring claims for unlawful deductions from wages in respect of a "series" of underpayments where the gap between the deductions was 3 months or less.
The third point was a very important aspect of the decision since it severely limited the ability to bring claims for historical underpayments. On this point, the EAT decided that a series of deductions must have a sufficient factual and temporal link. This meant that there must be a sufficient similarity of subject matter, but also that there must be a sufficient frequency of repetition. In their view, this meant that there could not be a gap of more than 3 months in order for the deductions to form part of the same "series". You can read our detailed report on Bear Scotland 1 here.
The EAT has now ruled on this issue again in Fulton and another v Bear Scotland Ltd (No.2) (Bear Scotland No.2).
The Claimants brought claims for unlawful deductions from wages on the basis that overtime payments (and certain supplements) had wrongfully been excluded from their holiday pay. The Claimants relied on the fact that the European Working Time Directive requires employers to pay employees their "normal remuneration" during annual leave and that this included all components of pay that were "intrinsically linked" to the employee's contractual duties.
The Claimants argued that payments they received in respect of working compulsory, but non-guaranteed, periods of overtime were intrinsically linked to their contractual duties and should be reflected in their holiday pay. The EAT agreed with them and held that the Working Time Regulations 1998 could be interpreted to give effect to the wording and purpose of the Working Time Directive.
However, there was a sting in the decision for the Claimants. Whilst the EAT agreed that the historic underpayment of holiday pay was capable of constituting a "series of deductions", this would only be the case where there was a break between the deductions of not more than 3 months (the 3-month rule).
Following the EAT's ruling, the case returned to the Employment Tribunal to consider the merits of the claims. The Claimants' argued that the EAT's decision on the 3-month rule was obiter and not binding. However, the Tribunal disagreed, holding that the 3-month rule was part of the ratio of the decision. The Tribunal went on to find that this meant that the most of the Claimants' claims were out of time, due to the fact that there were gaps in excess of 3 months between the underpayments of holiday pay.
The Claimants appealed to the EAT. Again, they argued that the 3 month rule was not part of the ratio of the decision in Bear Scotland No.1 and was, therefore, not binding. In the alternative, they argued that it should be treated as a rebuttable presumption, rather than a universal rule. They also argued that the 3-month rule was inconsistent with the way in which a "series" had been interpreted in other contexts, such as whistleblowing.
The EAT dismissed the appeal. It decided as follows:
- The 3-month rule was part of the ratio of Bear Scotland No.1. The only way that a new EAT could reach a different decision would be if an established exception applied, which was not the case here.
- Even if an exception had applied, this EAT could not depart from the previous EAT's decision as this concerned the same set of proceedings. The correct route for the Claimants would have been to appeal the decision in Bear Scotland No.1 to the Court of Session.
- The 3-month rule was a clear rule, not a rebuttable presumption.
- The interpretation of "series" in the context of an unlawful deduction from wages claim was different from that needed in, for example, a whistleblowing detriment or discrimination claim. Different considerations applied.
This decision will be reassuring for employers facing claims for underpaid holiday pay or, indeed, other claims of unlawful deductions from wages. It confirms that the 3-month rule is a binding precedent and will be followed by the Employment Tribunals and the EAT (save where an exception applied which permitted departure, which is unlikely).
In practice this means that many employers facing such claims will have limited historical liability as a gap of 3 months or more between holiday payments will usually have occurred at some point. However, even where there are no such gaps, it should be remembered that regulations have imposed a 2-year backstop on unlawful deductions from wages claims brought after 1 July 2015.