BREAKING JUDGEMENT - Overtime could now be included in Holiday Pay

Overview:

The Employment Appeal Tribunal has this week made a landmark decision in relation to the calculation of holiday pay. This is a highly controversial decision which, it is highly anticipated, will be appealed. The Government have also announced that they will be setting up a ‘Task Force’ to look into the matter further, due to the potentially huge impact this ruling will have on businesses in the UK.

This was in the news earlier in the year when it was debated as to whether commission payment should be included when calculating holiday pay, which is undergoing appeal, due to be decided on in February 2015. The Tribunal has now been asked to consider whether overtime must also be taken into account here as well.

The case centred on the Tribunals interpretation of the European Directive and if the National Law was compatible with that interpretation. As part of our membership to the European Union, all UK law must be implemented in line with the intentions of the EU Directives. If it is deemed that the National Law is incompatible, the Tribunal can rule that the law should be changed.

Crux of the Decision:

Under the EU Directive, workers should be entitled to their ‘normal pay’ when taking annual leave. Previously this was interpreted into National Law as meaning the employee’s basic wage only. However the Tribunal has ruled that this is unfair, and from this case has deemed that overtime should now be included (averaged over previous 12 weeks) in any holiday pay.

It is worth noting at this stage that this will only apply to the first 4 weeks of the employee’s annual leave, as this is the minimum holiday allowance given in the EU Directive. The additional 1.6 weeks given under National Law and any additional annual leave you give to your employees over and above the statutory minimum will not be subject to this ruling.

At present it is inferred that this will only be implemented for mandatory overtime, as the ruling states nothing about voluntary overtime (unless regularly worked). However this may alter at a later date.

Backdating Claims:

The ruling made it clear that the UK law is incorrect and as such employees are entitled to backdate their claim to previous periods of holiday pay. This appears highly unfair on businesses, as they were simply complying with the law that was present at the time.

However, the Tribunal have limited that period of backdating by stating, if there is a break of more than 3 months in a ‘series of underpayments’ that will break the chain and thus backdating will cease from that date.

An unlawful deduction from wages will occur from the date the deduction was made, i.e when they are paid for that period of holiday, and not when the leave was taken.

In essence, this means that the employee will have to trace back to each period of holiday they have had, and if this holiday is taken within 3 months of the last one, they can go further back, until there is a break of more than 3 months:

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Example:

An employee takes the following holiday over an annual leave year;

13 January – 20 January – paid on 28 January 2014
14 April – 16 April – Paid on 28 April 2014
5 May – Paid on 28 May 2014
16 June – 23 June – Paid on 28 June 2014
20 August - 27 August – Paid on 28 August 2014
20 October – 22 October – Paid on 28 October 2014

The employee would be able to back date up to the leave taken on 14 April 2014, as this is where the chain will break, due to there being more than 3 months since there previous holiday period.


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There is further scope here given that the employee is only entitled to claim this for 4 weeks of their holiday year, inferring that 1.6 weeks of their annual entitlement has been correctly paid. In reality then, backdating may only be limited to one annual leave year.

In the above scenario, if it is deemed the employee takes their core 4 weeks entitlement first, the date of the first unlawful deduction would be on 28 October 2014, as this is the first day of the employees additional 1.6 days leave. In the above scenario it would not alter when the break in the chain occurred.

It is therefore key for employers to now get a handle on employees holiday and make sure there is a clear record as to when they are taken and when those dates are paid for.

What to do now:

At this stage, it is advised that all companies consider how much overtime is being used within their company and strip this back where possible to limit the amount of damage this can do. In relation to when to begin implementing the ruling, it is subject to much debate at this stage. As it is highly likely the decision is to be appealed, employers at this stage have a number of options:

-    Implement the ruling as a safeguard, as soon as possible. However if you do this and the ruling is overturned at appeal, you won’t be able to recover any sums paid to your employees.

-    Consult with your employees as to a middle ground here, e.g you begin to implement from the next holiday year at a set rate, as a temporary measure until any later ruling is reached.

-    Await confirmation of the government taskforces stance in this matter and take action accordingly.

-    Do nothing until the decision is appealed and a more definitive outcome is reached. There is a risk in doing this, as employees may be able to claim that you are in breach of contract and pursue you for underpayment and compensation. This will include all loss of interest on the payment as well. We believe this will be unlikely given the cost for claimants now being imposed when issuing claims to the Tribunal. However there may be a higher risk in starting an alternative scheme at this stage, given that it may exceed the final agreed outcome but act as precedent within your workforce. It is not known how the Tribunals would interpret such action in light of the uncertainty in this area; however we must always advice clients of any potential risks.

In summary, there is no clear way forward here at present and it is for each employer to individually decide what is the best course of action for them to take at this stage. The ruling unhelpfully does not set any guidance down as to when this ruling should be implemented into all UK Businesses.

 

Authors:

Published: 10 Nov 2014

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