Impact of holiday pay and overtime ruling on UK employers

In the countdown to Christmas, understanding the impact of a landmark Employment Appeal Tribunal will be critical to employers in sectors where staff traditionally work overtime during the festive period – for example retail, hospitality and care.

A recent appeal tribunal, which ruled that employers must take into account all compulsory overtime - and not just ‘normal pay’ when calculating employees’ holiday pay - has widespread financial implications for all companies paying overtime to their staff.

Under the new ruling, workers will be entitled to holiday pay which reflects compulsory, as well as guaranteed, overtime. However, this will only apply to the basic four weeks’ leave granted under the Working Time Directive. Staff can also make backdated claims, but only if it is less than three months since their last payment of holiday pay.

I would urge employers to start checking whether overtime is compulsory – this is particularly time sensitive for businesses in sectors who expect staff to be working additional hours over the festive period. They should likewise review their contracts of employment and offer letters to check whether overtime is stated to be compulsory in them. If necessary, employment contracts should be updated as a matter of urgency.

For businesses who expect to quieten down while others ramp up for a seasonal rush, now is a good time to put their houses in order. As well as working out if holiday pay needs to be adjusted in the current year, they should be planning for the future, as the ruling means that calculations under the Working Time Regulations are likely to be complex if varying amounts of overtime are worked.

Employers must also check and correctly factor in other elements of pay that can count towards holiday pay, for example ‘shift premia’ for working anti-social shifts.

As the ruling applies to backdated holiday pay too, I recommend that businesses decide when they will start correcting underpayments, and whether to do this retrospectively – and without losing face.

While it is clear that companies must address this new ruling, holiday pay is only a fraction of total wages, so avoid letting the holiday pay tail wag the overtime dog. For example, asserting that overtime is voluntary in order to save a relatively small amount in holiday pay might result in employees being able to argue at a later date that overtime is not contractual and so refuse to work it.

Over the coming months we can expect to see further updates on this ruling. Some employment experts believe that a further decision may extend to voluntary overtime.

It is expected that the ruling will be challenged through the Court of Appeal and the UK government’s Business Secretary Vince Cable has set up a working party to assess the impact of the new ruling on employers.

I strongly recommend that employers seek expert advice now in order to manage both future and backdated claims and to lessen the wider financial implications for their businesses.

Author

Barry Warne is a partner and head of employment law at hlw Keeble Hawson. For more information contact Barry Warne on 00 44 114 252 1437 or email [email protected].