Employers should act now to manage holiday pay

Employers should act now to backdate any employee pay that has been miscalculated, rather than wait to change their holiday pay policies following the Employment Appeal Tribunal’s (EAT) decision on three landmark cases in November.

Holiday pay

The EAT ruled that overtime pay must be included in holiday pay calculations, a decision that sent shockwaves through employers, with many fearing the potential cost.  

The judgments were made in Bear Scotland v Fulton, which focused on whether overtime pay or shift allowances should be included in holiday pay calculations, and in Hertel (UK) v Wood and others and Amec Group v Law and others, both of which appealed an EAT decision in February. The tribunal found in favour of staff and supported recent decisions by the European Court that employees should receive their normal pay when on holiday.

Neil Carberry, director of employment and skills at the Confederation of British Industry, said: “This is a real blow to UK businesses, which now face the prospect of higher administrative costs, as well as the risk of backdated costs potentially running into billions of pounds.”

Holiday pay has been a long-running issue for employers. In May, the Court of Justice of the European Union held that the Working Holiday Directive should require employees’ commission to be taken into account when calculating holiday pay. The finding in Lock v British Gas Trading and others means that employees who are paid wholly or partly by commission will be entitled to have this reflected in their holiday pay

Organisations must act now

Employers are now being advised by lawyers to begin assessing the extent to which they comply with the new rules, which some organisations may consider to be strategically advantageous, even if it results in them making overpayments. 

The John Lewis Partnership, for example, spent £40 million in 2013 compensating staff who were accidentally paid the incorrect amount and did not receive certain additions to pay, such as premiums for working on Sundays and bank holidays.

Carl Richards, employment partner at law firm King and Wood Mallesons, said: “It very much depends on an organisation’s particular circumstances, namely its staff working patterns and payment arrangements, and its appetite for risk. There is then a judgement call to make as to whether to pre-empt any further clarification in the law or to wait and see.”

Government sets up taskforce

The government has set up a taskforce to assess the possible impact of the EAT ruling

Business secretary Vince Cable said: “The government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from government and business to discuss how we can limit the impact on business.

“The group will convene shortly to discuss the judgment.”

But fears remain about the potential costs of backdated pay claims. In its ruling, the EAT commented on the reach of retrospective payments, which will have a limitation period to allow back-pay claims only until there has been a three-month break in underpayments.

Chris Wellham, of counsel at law firm Hogan Lovells, said: “The judge has given employers some hope. If there are three months between any underpayments, then it breaks the series. For most employees, it will not go back more than a year from when they last had a holiday.”

Voluntary overtime payments 

Employers that plan to act now should consider the lack of detail available around the EAT’s ruling, such as whether voluntary overtime will be included, which may result in them including all types of overtime in their holiday pay calculations and cost them unnecessary expense. 

Sarah Henchoz, a partner at law firm Allen and Overy, said: “While the case is not looking at voluntary overtime yet, employers can expect it is only a matter of time before it turns its attention to this grey area. The key priority is sorting out who is going to be entitled to backdated pay.”

There is likely to be an appeal on the EAT’s ruling.