The Employment Appeal Tribunal has ruled that overtime must count towards holiday pay but it’s not as bad as some are claiming for SMEs
Whether you’re an employer or an employee, we’re sure you noticed the ruling last month that the calculation of holiday pay should include non-guaranteed overtime. The decision has been hailed a victory for workers, with Paul Kenny, GMB general secretary, saying: “This judgment ensures that workers are properly paid for holidays and is a good and welcome result.” However, with 400,000 UK firms expected to be affected, millions of employees will make backdated claims of overtime. While employers will need to be prepared to work out how much they could be liable for to avoid being caught out, it is highly unlikely to be a “timebomb” that will bring small businesses to the brink as the Institute of Directors warned.
To give some context to the ruling, in the combined cases of Bear Scotland Ltd and others V Fulton and others, Hertel (UK) ltd v Mr K Woods and others and Amec Group Ltd v Mr Law and others, the Employment Appeal Tribunal (EAT) ordered on November 4th that there is an intrinsic or direct link between the earnings and the work that the employee is required to carry out. “In a legal nutshell this means workers are entitled for any pay in respect of overtime to be included when calculating their holiday pay,” says Sarah Cooper, legal Advisor at Allianz Legal Protection.
The British Chambers of Commerce warned that the ruling would leave firms “at risk of incurring significant financial losses, which could force them to close their doors altogether.” In response to such claims, Cooper believes that business leaders may be scaremongering over the effect this judgement will have. “In my experience from advising SMEs, some have always included overtime and commission payments in the calculation of holiday pay so this will not have a major impact on those who have always calculated using its employees' average actual pay and not their basic or normal salary.”
Of course, the bigger your business, the more time consuming this ruling will be but for SMEs it will be much easier. For those businesses with workforce management solutions already in place it will be an administrative breeze.
The greatest perceived threat to businesses with this ruling was that claims could go back to the implementation of the Working Time Regulations in 1998. However, the judgment limits claims for deductions where no more than three months has passed between any underpayments, so in reality it is likely employees will only be able to claim for deductions going back one leave year. “Of course leave to appeal has been granted so this position may change but in my opinion it is unlikely that the Court of Appeal will decide that employees can recover underpayments going back to 1998 as this would be a massive burden on businesses,” says Cooper.
It is also important to note that the judgment only includes the four weeks paid holiday required by the Working Time Directive (WTD) of 2003 and not the additional 1.6 weeks provided for under UK law. “This will limit the financial burden on employers; however it could also create an administrative nightmare differentiating between the four weeks and the 1.6 weeks,” says Cooper.
As 1.6 weeks of holiday need not include non-guaranteed overtime, it may be easier for employers to show a three month break between deductions. As Cooper points out, a three month break will prevent there being a series of deductions. The gap will also mean the worker will be out of time to present a claim to the employment tribunal in respect of this deduction. “The EAT gave leave for the parties to appeal to the Court of Appeal so the position may change,” she says.
There have been a number of cases at the EU courts in the lead up to this decision. Most notable the European Court of Justice had determined in May 2014 in the case of Lock v British Gas Trading Limited that contractual commission, determined by sales achieved, should be included in the calculation of holiday pay. “The WTD is clear in its aim that employees are entitled to take paid holidays and there must be nothing, such as a financial loss, that deters them from doing so,” says Cooper.
Cooper also highlights that earlier cases such as that of Stringer v Revenue and Customs Commissioners, although in relation to holiday pay, confirmed the position that the WTD’s purpose for paid leave is essentially to “put the worker in a position which is, as regards to remuneration, comparable to periods of work.”
She advises that future calculations of holiday pay will need to include overtime payments and commission. “The key word here is “future”; there has been no guidance as to how this is to be calculated and I would suggest basing a calculation on hours of work and pay received in the 12 weeks prior to the taking of holiday.” However, she believes that as employees could abuse this process by purposely working more overtime prior to taking holiday, in this regard a calculation using the previous 12 months may be preferable.
“Businesses now need to consider if they are going to start complying with the approach confirmed by the EAT from now and start calculating overtime in holiday payments or if they will continue to pay at the ‘old’ rate – without overtime or commission – until the final appeal has been heard as this decision could be overturned,” says Cooper.
While it seems unlikely that it will be overturned given the amount of cases leading up to this decision and the interpretation of European law, if businesses start paying now and it is overturned then they would not be able to recover additional payments made to employees. “Indeed by making the payments they may have made this a contractual provision so may have to continue making the payments regardless,” says Cooper.
Once the final decision is made, if employees start making claims for underpayments of holiday pay businesses could settle at this time. “In this regard businesses should consider putting funds aside from now to cover for this event,” she said.