Overtime should count in holiday pay

It is wrong for employers to only take into account basic pay when calculating how much employees should be paid while on holiday, the Employment Appeal Tribunal (EAT) has ruled.

The EAT added that workers could make backdated claims, but only if it is less than three months since their last holiday. This could leave businesses facing a multibillion-pound bill payable to their workforces.

The tribunal ruled on appeals brought by three companies, Bear Scotland, Hertel and Amec, whose employees had already been successful in their original claims.

Following the ruling, the business secretary Vince Cable declared: "Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a task force of representatives from government and business to discuss how we can limit the impact on business."

Under EU law, employees are entitled to four weeks' holiday pay a year. Since 1998, the UK's interpretation of that law says that holiday pay should be calculated at the basic rate. However, this has left those who work overtime or receive variable pay unsure as to their rights.

'Profound impact'

Reacting to the EAT's decision, Darren Isaacs, a partner at GQ Employment Law, said: "This ruling is going to have a profound impact on all UK businesses, costing them billions of pounds and potentially driving some to the wall. SMEs that regularly pay staff for overtime are likely to be the hardest hit. They could face enormous liabilities on backdated holiday pay claims that could stretch back many years, as they are less likely to have had the right systems in place to help them calculate their liabilities easily or the cash reserves to meet the liability."

Isaacs continued: "It's almost certain that this result will be appealed. Businesses are understandably angry that they have behaved in a way that they thought was compliant with the law, only to be told by the courts that they have not. Some of the businesses that are affected are inevitably going to look at taking action against the government for what they see as the government's failure to take on EU legislation and apply it properly."

The EAT is due to provide a second ruling on commission and bonuses in holiday pay, with Isaacs commenting: "Many professional employers in areas like financial services will now be profoundly worried about the ruling due on holiday pay and commission - a similar outcome would have major repercussions."

'Affordable solution?'

Udara Ranasinghe, a partner and employment law expert at DAC Beachcroft, said: "The hidden holiday pay story continues and this decision in favour of employees is by no means the end of it. Employers who have not already received significant demands for payment or substantial legal claims should quickly brace themselves to do so. However, there is some good news in the decision for employers about the time limit for making claims."

Ranasinghe added: "As the run-up to the next General Election gathers pace, we can also expect all the major political parties to face demands from UK employers to find an affordable solution, and fast."

Claire-Jane Nicol, a partner at Bond Dickinson commented: "The cost implications for those with large workforces and who regularly depend on overtime are significant. Businesses that are traditionally busy at Christmas time and who depend on overtime need to review their practises now. "Some employers are saying that the impact on the wage bill could put their businesses at risk; others are looking now at how they can cut costs or change working practises to meet the additional liability."

John van der Luit-Drummond is legal reporter for Solicitors Journal