GUIDANCE NOTE ON WORKING WITH THIRD AND INDEPENDENT SECTOR PROVIDERS IN VIEW OF RECENT RULINGS ON HOLIDAY PAY AND SLEEPOVERS
Introduction
1. This note is intended to provide guidance to commissioners of social care working with third and independent sector providers who are having to respond to recent legal rulings in respect of holiday pay for leave entitlement and sleepover shifts.
Holiday Pay
2. The Working Time Regulations, section 16(1) state that “A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, at the same rate of a week’s pay in respect of each week of leave”. A week’s pay is calculated in accordance with section’s 221 – 224 of the Employment Rights Act, where there are normal working hours for the employee when employed under the contract of employment.
3. Three cases were heard by the Employment Appeal Tribunal (EAT) during the summer of 2014. These cases were brought forward to test whether remuneration beyond basic salary should be taken into account in the determination of holiday pay: elements such as overtime, allowances, shift payments and bonuses.
4. On 4th November 2014, the EAT held in “Bear Scotland Ltd & others -v- Fulton & others” that payment for the first 20 days of holiday taken in each leave year must take into account these additional elements of pay. It was further ruled that there can only be a claim for back pay if less than 3 months has passed since loss of wages (i.e. the date of the last day of holiday). It is widely anticipated that the ruling on back-pay will be appealed, in which case, final resolution might not be forthcoming until the end of 2016.
5. It is important to note, however, that case law has developed significantly in recent months with Lock v British Gas Trading Limited providing a definitive and binding judgment (Court of Justice of the European Union) affecting the four weeks leave guaranteed under EU law. This judgement, which referred to a question over the payment of commission or financial bonuses, noted that all pay elements intrinsically linked to the performance of the tasks being carried out under the terms of the contract of employment, should be included in the calculation of holiday pay. Only genuine out-of-pocket expenses payments can be excluded, such as travel and subsistence.
6. COSLA and SPDS provided an Advice Note to all councils in July 2014 which recommended “that councils make a payment recognising the redefinition of holiday pay in this financial year to prevent the continuation of the unlawful series of deductions from wages”.[1] COSLA is currently in discussion with our Trade Unions to determine how best to handle the issue of back-pay, recognising that the EAT ruling significantly reduces the scope of those discussions.
Sleepover Shifts
7. In addition to the above, the Employment Appeal Tribunal recently agreed[2] with an Employment Tribunal finding that a senior care assistant who carried out sleepover shifts in a care home was entitled to receive the National Minimum Wage for all night shift hours, regardless of whether or not they were actually working during that time.
8. The Employment Appeal Tribunal concluded that since the residential care home had a legal obligation to have a person with the claimant’s qualifications on site at all times, they should be paid to satisfy this requirement. Their mere presence was therefore enough to constitute working time for National Minimum Wage purposes.
9. Legal advice indicates this case has significant implications for service provider employers whose staff are required to work sleepover shifts and whose commissioning and funding arrangements are such that these staff are paid an allowance below the National Minimum Wage.
Scale of the Challenge for Independent/Third Sector Providers
10. COSLA met recently with CCPS (Coalition of Care and Support Providers in Scotland) and Scottish Care, who expressed concern on behalf of their members about the financial implications of these rulings. The scale of the problem is currently unclear, however, based on an initial survey undertaken by CCPS, our view is that the cost of ensuring legal compliance is likely to be significant for affected services and could, in the most extreme cases, jeopardise the financial stability of some providers (see Appendix for a summary of the survey findings).
11. Providers also point out that the cost of ensuring legal compliance sits within an already demanding financial context which has often involved real-terms cuts to fee levels; additional financial pressures such as the growing imperative to become “Living Wage” employers; increases to the Minimum Wage (including anticipated above-inflation uplift for 2015-16); and the additional costs accruing from pension auto-enrolment, which providers indicate will amount to 1%-2% of annual turnover.
Implications for Third/Independent Sector Providers
12. COSLA is working with CCPS and Scottish Care to share information about the implications of the legal rulings and the extent to which there is a settled legal position. This includes discussion about practical issues such as the timescales for claim eligibility, methods of calculation, definitions of terms like ‘regular’ overtime, and assumptions used in calculating exposure to risk.
13. However, in addition to an exchange of information, we have agreed to encourage and promote a partnership approach between commissioners and providers in jointly addressing the financial and workforce implications of these rulings, and the mitigation strategies that might be employed moving forward.
Shared risk and responsibility
14. Clearly, the key legal responsibility to comply with these rulings sits with the employer (i.e. the provider). Our legal advice indicates that if a local authority has contracted with a third or independent sector provider and that contract requires sleepovers (or another of the activities listed), then the contracting local authority would only be directly liable to meet any of the costs that the employing third/independent sector organisation accrues as a result of falling foul of the sleepover ruling if that was specifically provided for in the contractual arrangements. We would advise each local authority to secure its own legal view on these matters.
15. Notwithstanding this position, it is our view that a local authority, as the commissioner of the service(s) vulnerable to the implications of these rulings, has a wider set of responsibilities to engage with and support providers in dealing with the effects of these legal rulings. We would advise authorities to take a proactive approach to dialogue with providers on the basis that the implications of the rulings involve a strong element of shared risk.
Mitigation
16. The survey material from CCPS indicates that the impact of these judgments will not be felt uniformly across the sector: those organisations that rely more heavily on sleepovers (e.g. in supported living arrangements) and which rely on working practices such as overtime payments will be more exposed. While there is a realistic prospect of financial pressures building within some independent and voluntary sector organisations, it is unlikely that these problems can be completely solved in a blanket way, either nationally or locally.
17. In the first instance, local authorities should consider developing a ladder of support, as outlined in the graphic below, based upon principles of early intervention, to ensure that a standard monitoring of risk can be used to target support where providers find themselves in difficulty.
18. Openness and transparency will be important principles in determining the significance of risk: it is good practice for local authorities to establish levels of financial stress through an open book process. This in turn should lead the local authority to work with the provider to coproduce a solution that protects continuity of support for individuals and families, and counteracts potential business failure.
19. Where dialogue with a provider suggests that service budgets are likely to come under significant pressure as a result of these rulings (and/or other additional costs as outlined in para 11 above), local authorities should seek to work with providers and (where relevant) regulators to explore new operating arrangements that have the potential of removing associated costs. While there are measures that can be taken by providers to ensure legal compliance which, prima facie, will not affect the quality or reach of a service – such as increasing sleepover payments – these could drive cost into the system. There are other measures that might take costs out of the operating model – such as restricting overtime or moving from sleepovers to on-call arrangements – but which might affect service reach. Or again, there are measures that could be taken which are both cost reducing and innovative: such as the use of new technologies. There will therefore be a basket of measures that are available as a way of reducing costs and becoming legally compliant. There are also in principle a range of options available to the local authority to ensure ongoing viability of service, including a re-examination of fee rates.
20. In the event that recovery is not possible, contingency planning and direct intervention may be required, as described in the diagram above. This will obviously involve working with the provider to ensure that the health and well-being of service users remains paramount during any change process. Authorities will of course need to be aware that all providers will be subject to the additional costs associated with these rulings and that therefore the potential of service transfer to achieve cost reduction or containment is likely to be limited.
Conclusion
- COSLA will continue to work with CCPS and Scottish Care to understand the full impact of the legal rulings referred to above – and we will continue to explore whether we can support our respective members through collective discussions about whether action can be taken nationally. In the meantime, it is recommended that commissioners give consideration to the issues raised in this advice note.
APPENDIX: SUMMARY OF PROVIDER SURVEY
CCPS conducted a survey of its members to determine the likely impact of the recent rulings on holiday pay and payment for sleepover shifts. 36 completed questionnaires were received by the closing date (representing 50% of the CCPS membership). These organisations had a combined annual income in 2012/13 of just under £671M, an average of 76% of which per organisation related to publicly funded service provision. 26 respondents had assessed their exposure to the risks associated with the rulings. Of these:
Sleepover Risk
62% consider themselves to be significantly exposed. Liability per organisation ranges from £20k to £3.1M per annum.
For half these organisations, their assessed liability represents 1% of annual income or less. For most of the remainder, the percentage is between 2% and 5.5%. There are a couple of ‘outliers’ at the upper end, where the percentage runs well into double figures.
These organisations are also looking at potential liability for back pay although it remains unclear how far back they will be expected to go in their calculations.
Overall, the level of exposure to risk does not appear to correlate to the size of organisation. More important are the service models in place and the interplay between organisational pay structure and frequency of sleepover shifts. Organisations note that the requirements of commissioning authorities (including contractual terms) are pivotal in this respect.
Those remaining organisations that consider they have minimal or no exposure to this risk either (a) do not operate services requiring sleepover shifts, or (b) are working on the assumption that they will be covered by current practice in calculating National Minimum Wage.
Holiday pay risk
Proportionately fewer (only 2) consider that they have no or minimal exposure.
The exposure across affected organisations ranges from £4k to £800k per annum.
The highest liability, expressed as a percentage of organisational income, is 1.5%; the exposure for most is 1% of income or less.
It is not clear that all organisations have calculated their potential liability in the same way; for example some have specified which additional payments have been included, whilst others have not; reference periods for the purpose of calculation also appear to vary. Assumptions made about liability in respect of back pay are similarly variable, as is the case for sleepover calculations.
[1] This guidance note is available to member councils upon request
[2] http://www.employmentcasesupdate.co.uk/site.aspx?i=ed22091