Briefing November 2014

Holiday pay must include overtime, but scope for backdated claims may be limited

National news is feverishly reporting today’s decision by the Employment Appeal Tribunal regarding the calculation of holiday pay amidst concerns from government and industry that it could have serious financial implications for many businesses and the economy generally.

As widely predicted, the EAT has said that holiday pay needs to include pay for non-guaranteed overtime which was worked by the employee in the period before the holiday. ‘Non-guaranteed overtime’ means overtime that the employee is contractually required to work, but which the employer does not promise to offer. It follows that guaranteed overtime is also covered by the decision.

The EAT decided, though, that this only applies to the core legal holiday entitlement deriving from EU law, being four weeks each year. The UK legal minimum is of course 5.6 weeks, but the additional 1.6 weeks is a domestic UK rule, not one determined by the EU, so that can be paid without overtime. So too, therefore, can any further holiday over and above the legal minimum which an employer elects to provide. Whilst that is good news for employers, it raises the tricky prospect of having two rates of holiday pay and the need for systems to determine which element of holiday an employee is taking.

The fears that this ruling would open the floodgates to claims for arrears of holiday pay going back as far as 1998, leaving many employers with a potentially enormous bill, may, however, be exaggerated.

The EAT has concluded that, under the working time rules, successive underpayments of holiday throughout an employment should not necessarily be regarded as a ‘series of deductions’ allowing all arrears to be claimed. If there is a gap between two underpayments (i.e. two periods of holiday) of at least three months, the chain is broken and no claim can generally be made for the underpayments before the three month gap.

In principle that sounds like good news for employers as most employees are likely to have had at least a three month gap between holidays in the recent past. Bear in mind, though, that a single day of holiday would be enough to preserve the historic right – and that might include a paid bank holiday (bank holidays being spread across the year, of course). On the other hand, as noted above pay for days taken over the four week EU minimum do not, according to the EAT, need to include overtime pay so they may have been paid lawfully, thus allowing the three month gap between unlawful payments to be achieved.

Is this starting to sound complex? I fear so, and in fact it exposes the slightly dubious logic of the EAT’s approach. Nonetheless, it signifies that there may well be a policy-based attempt to put a brake on retrospective claims. That will no doubt be encouraged by Vince Cable who has set up a Taskforce which, according to a BIS Press Office tweet, will ‘look into limiting impact of holiday pay ruling’. That Taskforce consists of seven employer’s organisations, but no unions or law centres. The government’s stance on this is pretty transparent.

The EAT judgement does not address the possibility of an employee claiming the underpayments as breach of contract claim, although there are reasons for thinking that such a route would not be possible. If it were, claims would be limited to six years of arrears though.

The ruling follows the recent European Court decision that holiday pay must take account of sales commission. It paves the way for debates on whether other forms of flexible pay, including bonus, must also be included in holiday pay.

An appeal to the Court of Appeal seems inevitable, particularly in relation to this whole question of retrospective claims, with the potential for onwards reference to the European Court of Justice. This legal story has some way yet to run.

Especially in light of the determination on retrospective claims, employers should not rush into any decisions. I do, though, recommend undertaking an assessment of the pay package and what elements may have to form part of holiday pay going forward so that future employment costs can be assessed. That in turn might have an effect on the pay increases an employer feels able to grant.

Employers should also brace themselves for tribunal claims to be lodged by employees who want to protect their rights to higher levels of holiday pay as early as possible.

If you want to discuss the implications of this decision with me, please do feel able to get in touch.

Darryl Evans
T: +44 (0)7771 725341

The information and any commentary contained in this newsletter are for general information purposes only and do not constitute legal or any other type of professional advice. Darryl Evans and Evans Employment Law Limited do not accept any and, to the extent permitted by law, exclude all, liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. If you have a particular query or issue you are strongly advised to obtain specific, personal advice and not to rely on the information or comments in this newsletter.

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