07 November 2014

Backdating of overtime holiday pay. What the EAT ruling means for employers.

This week, the media headlines have been awash with the news that workers can now sue their employers for £millions in backdated holiday claims, going all the way back to the 1990s.

The headlines are the result of a landmark ruling by the Employment Appeal Tribunal (EAT), made on 4 November 2014, which ruled that overtime payments should be included in the calculation of holiday pay. With government figures estimating that over five million workers in the UK work overtime, we look at how this ruling may affect you and your business.

In the UK, we normally calculate holiday pay based upon a worker's basic salary. However, we don't normally include non-guaranteed overtime, commission or similar payments, as any overtime which the employer is obliged to provide has always been reflected in holiday pay.

A series of recent judgments have made it clear that European laws (which normally trump UK laws) require employers to factor in compulsory overtime (ie overtime which the employee is obliged to undertake if asked to do so by the employer) and commission payments – and anything else a worker would normally receive if they were working – so they are not dissuaded from taking holiday by being paid less when on holiday than when at work.

Most of the recent headlines, however, have missed out four key points and, as the saying goes: ‘the devil is in the detail’. So, what are these details?

Firstly, this higher holiday pay rate only applies to the first four weeks' paid holiday each year. The employer can continue paying basic salary for any additional annual leave (although it is worth noting that the rules are slightly different if the employee doesn't have normal working hours).

Secondly, employees are very unlikely to be able to bring large, historic backdated pay claims. The EAT decision makes it clear that if there is a three month gap in holiday underpayments, then the employee cannot claim further back in time. So the likelihood is that this will affect holiday payments going forward, and employers are not, perhaps, as likely to face large backdated pay claims as media coverage would suggest.

Thirdly, we still don't have a formal ruling on whether entirely voluntary overtime is included (ie overtime where the employee is entitled to say either 'yes' or 'no' to). Although it's likely to be another couple of years until we have a formal ruling on that, our view is that the inevitable consequence of this month's ruling is that you need to consider very carefully whether or not voluntary overtime should also be reflected within holiday pay.

Fourthly, the judge gave permission for the case to be appealed to a higher court. That means, unless the parties settle, that this is not the final word – although, in our opinion, we think the Court of Appeal is likely to reach broadly the same decision.

In the light of the judgment, we recommend that all employers review their holiday pay arrangements. If you're not sure about the implications for your business, please do get in touch with us and we can look at it together.

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