HOLIDAY PAY RULING: A LOOMING AND COSTLY HR CRISIS

A decision by the Employment Appeal Tribunal (EAT) will have widespread implications for employers across the UK.

It could lead to a wave of holiday pay claims to Employment Tribunals this year and the result could even force some companies out of business.

Background

Since 1998 most employers in the UK have calculated holiday pay without usually including payments such as working allowances, overtime, commission and bonus payments, unless the pay varies with the amount of work done or time of the work (shift work).

Earlier this year, the European Court of Justice ruled that commission should be included when calculating holiday pay in Lock v British Gas Trading Ltd, in which a sales consultant successfully claimed he suffered financial disadvantage as his holiday pay was calculated without taking into account commission which made up 60 per cent of his total remuneration.

The issue is key for many workers heavily reliant on commission, including those in sectors like financial services, insurance and sales.

Employees have since raised claims with the UK Employment Tribunal, including those who felt overtime should also be included in the holiday pay calculation.

The decision by the EAT on whether voluntary overtime should be included has been awaited since July.  Today's case Bear v Fulton has determined that voluntary overtime must be taken into account when an employer calculates a week's pay for holidays too.

These decisions could mean UK legislation will have to be changed, because it does not comply with European law. Potentially, it could also mean, employees say, that claims for holiday pay based on overtime and commission have to be backdated to 1998, when the UK Working Time Regulations were introduced. This has not been tested by the courts or tribunals yet.

Last year John Lewis reportedly paid out £40million to staff for backdated holiday pay because of a miscalculation; and which would allow it to curb future liabilities.

The main findings of the judge were:

1. That the employers' appeal failed on the basis that Article 7 requires and required non-guaranteed overtime to be paid during annual leave. The Judge stated that he could see no scope for uncertainty and was not persuaded to make a reference to the Court of Justice of the European Union. It formed part of "normal remuneration".

2. That the Employers appeal also failed on their argument that the Working Time Regulations that implement the European Working Time Directive and which state that holiday pay does not include optional overtime should prevail.

3. Very importantly the Judge also considered the issues of how far back claims for unlawful deductions from wages could be made and said: "Parliament did not intend that jurisdiction could be regained simply because a later non-payment, occurring more than three months later, could be characterised as having such similar features that it formed part of the same series. The sense of the legislation is that any series punctuated from the next succeeding series by a gap of more than three months is one in respect of which the passage of time has extinguished the jurisdiction to consider a complaint that it was unpaid."

This part of the judgement will limit the potential value of many claims for backdated holiday pay that includes overtime.

Katy Wedderburn, Partner at leading Scottish law firm MacRoberts, who is accredited by the Law Society of Scotland as a specialist in Employment Law, said: “This long-awaited decision from the Employment Appeal Tribunal was dreaded by many employers but it is not as bad as it could have been."

“It is potentially the biggest issue facing employers this year and could have a similar impact to the equal pay claims of recent years.

“We can now expect a huge wave of claims coming forward now with potentially millions of people affected. In fact, many employers already have had claims made against them by significant numbers of employees pending this result.

“There is a bit of uncertainty over the back pay issue. On one hand, employers could face claims backdated to 1998 from long serving employees but, on the other hand, there is an argument that employers cannot be liable if they were complying with UK law. Potentially, if there is a significant back pay liability, it could be fatal for some companies if they had to pay it.

“Some larger employers have been anticipating this decision and have started negotiations with workers and their representatives on mutually acceptable terms.  Some employers are likely to be able to come to some agreement with their staff, but others might find themselves in difficulty as they may not have the resources to make large payments.

“Our advice now to companies it to look at how they are calculating holiday pay to determine whether they will be affected by this ruling. They should then examine the cost of this to the business and how things will change going forward.

“If they are affected, they need to work with staff and the trade unions so that acceptable solutions can be reached for everyone concerned.

Katy Wedderburn is available for further comment on 0141 303 1372

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The ruling could lead to a wave of holiday pay claims to Employment Tribunals this year and the result could even force some companies out of business.
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This long-awaited decision from the Employment Appeal Tribunal was dreaded by many employers but it is not as bad as it could have been.
Katy Wedderburn, Partner in MacRoberts