Holiday pay & overtime ruling is headache for employers

The Employment Appeal Tribunal has made an important decision on holiday pay and overtime. The position previously was that only basic pay needed to be taken into account when calculating a worker’s holiday entitlement. The Employment Appeal Tribunal has now ruled that voluntary overtime should count towards calculation of holiday pay. A summary of the decision is as follows:

1. Workers are entitled to be paid a sum to reflect normal non-guaranteed overtime as part of their annual leave payments;

2. This only applied to the basic 4 weeks leave granted under the Working Time Directive and not the additional 1.6 weeks under the Working Time Regulations or any other additional contractual holiday entitlement that may be set out within a contract of employment or agreed verbally between the employer and worker; and

3. Claims for holiday pay will be out of time if there is a break of more than three months between successive underpayments.

This decision is likely to have a significant impact on employers where they have staff regularly doing overtime in terms of costs going forward and implementing any changes that need to be made.

Given the implications of this decision, employers who have workers doing overtime should consider the following:

• Calculate the costs of changing any systems in place going forward and what your potential exposure is on this so this can be budgeted for;

• Decide whether it would be simpler to pay all holiday pay at the enhanced rate going forward or whether you are able to differentiate between the four weeks under the Working Time Directive, the additional UK statutory leave and any other contractual leave entitlements under a contract of employment which are not covered by the decision;

• Ask your existing payroll provider whether they can deal with any changes that may be needed going forward;

• Consider what overtime arrangements you offer to new workers commencing employment in the future;

• Due to the costs involved, would you want to limit the overtime available to workers going forward?; and

• Consider whether any of your existing contracts of employment and/or policies concerning holiday pay within an employee handbook require updating.

It is likely that the Employment Appeal Tribunal’s decision will be appealed to the Court of Appeal. The Employment Appeal Tribunal have already granted permission to appeal. For now, it will be case of waiting and seeing if an appeal is made and if so, what the outcome will be. It may be some time before a decision is made and therefore for now employers may be minded to consider the above points before making any decisions on the implementation of any changes.

For advice on holiday pay entitlement or any other employment law issue, please contact Sally Eastwood directly at Sally.Eastwood@farleys.com or call 0854 050 1958.