Holiday pay ruling set to create financial and administrative headache for businesses

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A landmark decision today by the Employment Appeal Tribunal could have significant financial consequences for businesses of all sizes.

The issue involved the calculation of holiday pay for staff who work overtime. Holiday pay has traditionally been calculated by reference to ‘basic pay’ averaging over a 12 week period. It has been settled for some time that employees who work guaranteed overtime should have this element incorporated into their holiday pay calculation.

There were a series of first instance decisions over the summer that stated overtime (and certain other payments) should also be included within the calculation, however these decisions were not binding. Today’s decision from the Employment Appeal Tribunal does now form a binding precedent which all Employment Tribunals must follow.

Pam Sidhu comments: “There are wide-ranging impacts on UK businesses. Moving forwards, employers will need to carefully examine all components of employees’ pay, including overtime payments, to check whether they should be included in holiday pay calculations. Employers will need to ensure that guaranteed, as well as certain non guaranteed, overtime is included as a result of today’s ruling. ”

Darryll Thomas further comments: “It is likely that employers will now face an influx of claims from employees for historic holiday payments, where employees’ calculations of holiday pay only included basic pay and not overtime. It was initially feared that such claims could go back as far as 1998, when Working Time Regulations were implemented. However, following a successful appeal, such claims can only be made in respect of an ongoing loss, making it difficult to link together different holiday pay periods as one ongoing series of deductions. This is an important victory for employers, as it significantly reduces the possibility of employees successfully claiming backdated holiday over a number of years. Of course, an employee who can demonstrate they have taken a single day’s holiday every month for the last 3 years, for example, could make a claim in respect of the whole period on the basis that it represents a chain of linked events.”

It should be noted that the ruling only applies to the statutory element of the holiday entitlement and so any additional holiday entitlement provided by the employer is not subject to the ruling.

If you have any queries arising from this update, please contact Pam Sidhu or Darryll Thomas.