Employers, Holiday Pay and Overtime: The Implications of the Recent Employment Appeal Tribunal Decision

Historically, workers with ‘normal working hours’ received holiday pay based on basic salary only. Where those workers with ‘normal working hours’ worked overtime, those additional earnings were disregarded for the purpose of calculating holiday pay. This resulted in those workers who were used to earning a substantial amount from overtime, suffering a shortfall in their earnings when they took holiday.

This is exactly what happened to the workers who were the subject of this week’s Employment Appeal Tribunal (EAT) decision. In that case, the workers challenged the historical position and claimed that holiday pay should include overtime, even though the overtime was not guaranteed. The EAT confirmed its agreement with the workers that holiday pay should include a sum of money to reflect non-guaranteed overtime. Permission has been granted for the decision to be appealed to the Court of Appeal. However, it seems almost certain that the general concept of holiday pay including payment for overtime is here to stay. The appeal is more likely to focus on the details which remain contested or unknown such as: 1.How far back workers can claim backdated holiday pay? 2.What reference period should be used for calculating holiday pay? Should this be an average over the year, the last twelve weeks or some other time reference? It is worth noting that the overtime entitlement applies only to the 4 weeks’ leave provided by the European Directive and not to the additional 1.6 weeks’ leave provided by the Working Time Regulations 1998 or any further contractual entitlement. In practice, drawing a distinction between the different types of leave and thus creating a multi-tiered system for calculating holiday pay is likely to be avoided by employers. Not only will a multi-tiered system cause administrative difficulties for employers, it is probably going to be extremely unpopular with the workforce. So what practical impact will this decision have for employers?

Claims for backdated holiday pay

Workers are entitled to claim for shortfalls in holiday pay previously paid when overtime has not been reflected. Before the decision, there were concerns that claims for backdated holiday pay may go back years and potentially even back to 1998 when the Working Time Regulations were introduced. Employers were pleased to see that this week’s judgment limited the scope of such claims. The judgment confirmed that, if there is a gap of more than three months between any two periods of holiday, the series of deductions is broken and no claims can be brought in relation to the historic underpayments. In practical terms, because of that limitation on claims for backdated pay, it may be considered sensible for employers to try and negotiate settlement of potential claims with workers now (before the appeal is heard). The outstanding appeal may allow for backdated claims beyond the existing time scope and expose employers to greater liability. Unfortunately, the decision provides no guidance on how holiday should be calculated. Therefore, negotiations will be subject to some guesswork for both employers and workers.

Future holiday pay

Going forward, employers must ensure that holiday payments include payments that the workers would routinely receive for overtime. However, as outlined above, employers may face some difficulty putting this into practice given that it remains unclear what the reference period for that calculation should be. Continued underpayments will entitle workers to bring claims. By contrast, overpayments may be difficult to recover from workers in the future. Employers will need to balance the risks and costs of adjusting calculations now or sometime in the future when further clarity is provided.

Commission payments

It should also be borne in mind that an ECJ ruling earlier this year established that commission payments (which are intrinsically linked to an individual’s work) should also be taken into account for calculating holiday pay. Again, the reference period for the calculation remains unknown and so the same considerations as outlined above will apply for backdated claims and future holiday pay.

Government task force

The Government are in the throes of putting together a task force to review the financial impact that the EAT decision will have on UK businesses. No doubt the task force will make their views known at the next stage of the appeal process.

Summary

The EAT decision has had widespread press coverage and so this is a matter that employers will struggle to avoid. Whilst permission has been granted for appeal of the decision, that appeal is likely to focus on the detail as it seems almost certain that the concept of holiday pay needing to include payment for overtime is here to stay. Some employers may wish to wait until all the issues are resolved (including the highly unlikely scenario that the whole decision is overturned) before negotiating with its workers, but that will inevitably result in them receiving claims in the Employment Tribunal. Therefore, whatever employers decide to do, they will be well advised to acknowledge to the workforce that they are aware of the issue and explain the reasoning behind their proposed response. If you have any concerns or queries about this matter then please do contact a member of the employment team on 01895 207892, or email your details to employment@ibblaw.co.uk.