The Latest Twist in Holiday Pay – Please, Sir, I Want Some More.

Where overtime is regularly required by an employer and worked, it makes sense for an individual to consider this as part of their normal remuneration.  There is also an intrinsic and direct link between this work done and overtime pay received.  The argument goes that a worker should not be dissuaded from taking holiday on the basis that they would not otherwise be paid their normal pay.

Putting this all together, the Employment Appeal Tribunal had no hesitation in giving a judgment last week that payment for non-guaranteed (but required) overtime should be reflected in the calculation of holiday pay.  However, this only applies to the first four weeks of a worker’s holiday entitlement, which means that employers could continue to pay the remaining 1.6 weeks’ annual holiday at basic rate.

In light of recent ECJ case law, this first part of the judgment was not unexpected.  However, employers will be pleased that the EAT went on to decide that a gap of more than three months in a series of alleged underpayments of holiday pay will mean that tribunal claims for deductions before the gap will be out of time.  This is a significant restriction on the value of claims and potential claims for underpaid holiday pay.

The EAT also held that where allowances were paid for travel time which were part-taxable to the extent that they exceeded expenses incurred, the taxable part should also be included in the calculation of holiday pay.  Again, this was because there was a direct link between work done and payment received.

So what should employers do now?  First of all, this judgment may well be appealed by both employers and workers to the extent that it went against them; these appeals might take several years.  Next steps to be taken will therefore depend on an employer’s level of and attitude to risk.

If not already done, all employers should calculate the size of potential claims for underpayments based on overtime, taxable allowances (of the type referred to above) and commission.  This calculation should be done for all current employees and all those who left in the last three months, based on underpayments from the last three month gap in holiday taken and also all the way back to October 1998 (just in case the “gap” argument is overturned on appeal).

Armed with this information, an employer can then decide whether to –

• Change overtime practices going forwards
• Settle any claims already brought
• Ask for a continued stay of any existing claims
• Wait and see what happens on any appeal
• Wait for the outcome of the Government’s review on “how the impact on business can be limited”
• Make accruals for actual or potential claims
• Make changes to holiday pay calculations going forward for the first four weeks
• Pay all holiday at the same higher rate

Employers should also be aware that holiday pay must already reflect overtime which is both guaranteed and compulsory.  However, it is not clear whether payment for purely voluntary overtime should be included.  We’ll need to wait and see on that point.

Please contact us if you would like to discuss what course of action best suits your organisation.

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