Overtime Should Count in Holiday Pay: Ground-Breaking Case at the Employment Appeal Tribunal

Around 5m people could be eligible to collect backdated holiday pay, after the Employment Appeal Tribunal ruled that employers must include overtime when calculating holiday pay.

The tribunal ruled on three cases – Bear Scotland v Fulton, Amec v Law and Hertel v Wood – the latter two backed by the union Unite, which said the employees consistently worked overtime, but had not had it included in holiday pay, meaning they received “considerably less” pay when on holiday compared to when they were working.

Concerns that employers could find themselves paying millions in back pay dating back to 1998, when the Working Time Directive was first enforced, have been allayed by the ruling. Claims for unlawful deductions of earnings must be brought within three months of the deduction or within three months of the last of a series of unlawful deductions. It also ruled out inclusion of the extra eight days of annual leave employees are entitled to under UK law.

Howard Beckett, director of legal services at Unite, said that the ruling “not only secures justice for our members who were short changed, but means employers have got to get their house in order”.

Back dated pay could be a “timebomb” for businesses

The UK’s interpretation of EU law says holiday pay should be at the basic rate; however, a case heard by the European Court of Justice (ECJ) earlier this year called this into question. In Lock v British Gas, the ECJ noted that a salesperson’s holiday pay could not be limited to their basic salary, meaning that any worker whose pay is either wholly or partly in commission will be entitled to have this reflected in their holiday pay when they take annual leave.

Commenting on the latest decision, Confederation of British Industry director general John Cridland called it “a real blow to UK businesses”, continuing: “These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions”. Simon Walker, director general of the Institute of Directors, described it as a “timebomb”, and added “It is not an exaggeration to say that some small businesses could end up being wiped out”.

Institute of Chartered Accountants of England and Wales director of business Stephen Ibbotson said, “At a time when business confidence is falling amid an uncertain economic future, this ruling has the potential to seriously impact growth prospects”.

Employment ruling subject to appeal

The government itself has yet to respond to the ruling; however it is known to be supportive of the businesses, and a spokesman said “We understand the deep concern felt by many employers and have intervened in the employment appeal tribunal cases to make our views clear”. Business Secretary Vince Cable has set up a taskforce to review the judgment in detail, which will then meet to discuss the financial implications for employers; the group will include representatives from the CBI, as well as the Federation of Small Businesses.

The decision could be appealed against, in both the European and domestic courts, with a final ruling potentially some way off. In the meantime, employers may wish to start factoring in overtime and commission into holiday pay and, in the longer term, look to update their remuneration policies and contractual leave arrangements with staff.

At IBB Solicitors, we take a proactive approach to workplace problems, helping employers find the best possible outcome for their employment issues. We can help advise on policy reviews and provide expert training for your HR team. Our specialist employment lawyers place heavy emphasis on continuing personal training and development, to ensure that they always present you with the most up-to-date legal and practical advice available.

Find out how we can help you settle disputes and stay on the right side of the UK’s ever-changing employment law by calling us on 01895 207892, or email your details to employment@ibblaw.co.uk.