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EAT holiday pay ruling explained

Citrus HR director Kirsty Senior and MLP Law's head of employment law, Karen Bexley, outline what the landmark ruling really means for businesses…

The UK Employment Appeal Tribunal (EAT) has recently ruled under the Working Time Regulations (WTR) that non-guaranteed overtime should be factored in when calculating the amount of holiday pay that an employee is entitled to.

On the back of this decision, Citrus HR director Kirsty Senior and Karen Bexley, head of employment law at MLP Law, have examined the implications that this may have on start-ups and small to medium-sized businesses and what it means in practice…

The ruling

Holiday pay now needs to include pay for non-guaranteed overtime which was worked by the employee in the 12-week period before the holiday. Non-guaranteed overtime is overtime that the employee is contractually required to work, but which the employer doesn’t promise to offer.

Previously, employers have been paying holiday pay based on an employee’s basic pay but now employers will have to take into account certain types of overtime, and potentially bonus payments and commission, when calculating holiday pay, rather than just considering basic pay.

Part of the problem for business owners is that, because the case is very high profile, a large number of employees are now likely to be made aware of it so their employers could see a surge in backdated holiday pay claims.

The fear is that this could then see companies hit with huge bills, potentially leading to large debts and cashflow issues. Whether that transpires remains to be seen and many businesses are unlikely to be affected.


Does the EAT ruling apply to voluntary overtime?

No. Although there will no doubt be further debate and case-law over whether overtime is voluntary or not and it is likely that future case law will determine that regular voluntary overtime will be deemed “normal pay”.

What does the ruling to include overtime for holiday pay apply to?

It only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks' holiday (as required by UK law) or any additional contractual holiday can be based on normal remuneration, excluding overtime.

What this means for you as a business owner is that, as well as potentially having to pay out more holiday pay going forward, you may have to pay out for previous underpayments as employees will now be able to claim backdated holiday pay.

What happens if there is a gap between claims of incorrect holiday pay?

If there is a gap of three months or more between claims of incorrect holiday pay then this breaks the chain for any claim. In practice, as the requirement to pay holiday pay only applies for the first four weeks' holiday then during the last three months of any holiday year employees are likely to be taking the additional 1.6 weeks' holiday or any additional contractual holidays.

The ruling's exact wording is: “any series punctuated from the next succeeding series by a gap of more than three months is one of respect of which the passage of time has extinguished the jurisdiction to consider a complaint that it was unpaid.”

This would significantly limit any historic claims, which provides some comfort to business owners. The maximum risk to most businesses is likely to be backdated claims for the current holiday year only.

As a business owner, what steps should I take following the ruling?

Businesses with non-guaranteed overtime have four options:

  • You can decide whether you are going to do nothing (which could result in a claim or at least impact on employee relations)
  • Pay all leave at the same rate (an average of relevant pay over the previous 12 weeks)
  • Have a two tier method of calculating holiday pay (payment for the first 20 days only and then a different method of payment for holiday over and above 20 days)
  • Paying an additional percentage of all non-guaranteed overtime undertaken by the employee reflective of their statutory annual leave entitlement (this would need to calculated carefully).

You will also need to consider whether you budget in the current financial year for any valid claims your employees may have for backdated pay.

How can I minimise the financial impact of the ruling on my business?

You should review your contracts and processes. This would include:

  • Changing contracts to provide for voluntary rather than “non-guaranteed overtime”
  • Limiting or refusing holidays after periods of high overtime
  • Using agency or bank staff to cover periods traditionally covered by overtime

Is anything being done to tackle the ruling?

In an attempt to limit the impact of this holiday pay ruling, Vince Cable has announced the launch of a government/business taskforce to look into this as a “matter of urgency”.

Although the correct law for now, it's worth noting that this decision could be appealed by the Court of Appeal or referred to EU courts which means that a final ruling could potentially be years away.

Kirsty Senior is director of small business HR software specialist Citrus HR. Karen Bexley is head of employment law at commercial law firm MLP Law


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