Article.

Earn more pay for taking the same holiday

07/11/2014

At a glance

The Employment Appeal Tribunal (EAT) has handed down a ruling that confirms that all elements of a worker’s normal remuneration, including payments in respect of non-guaranteed overtime, must be taken into account when calculating holiday pay.

EU law requires employers to give their workers a minimum of 4 weeks’ paid annual leave each year. UK national law later implemented a requirement that employers grant workers an additional 1.6 weeks’ paid annual leave on top of the 4 weeks’ required by the EU. EU law also states that while an employee is taking their annual paid leave the employee must continue to be paid his or her “normal remuneration” during the holiday to which they are entitled. What the EAT have done is to confirm what “normal remuneration” means for the purposes of calculating holiday pay. All payments which are directly or intrinsically linked to the worker’s normal, day to day work should be regarded as “normal pay” and therefore included for the purposes of holiday pay and this will include non-guaranteed overtime.

Furthermore, the ruling also stated that travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.

In detail

So what does this mean in practice?

First of all, this applies only to the 4 weeks’ paid annual leave entitlement under EU law and not the additional 1.6 weeks’ leave implemented by UK national law.

Retrospective effect

Looking backwards – if an employer has failed to pay the correct amount of holiday pay, then this constitutes an unlawful “deduction” from wages and as such, a worker can now claim this back. However, there is a limit placed on claims for back pay.

A worker can bring a claim in respect of a ‘series of deductions’; in such a case, the claim must be brought within three months of the last deduction in the series. A worker can link a series of deductions so long as there is no break in the ‘chain’ of the deductions of more than three months. This will severely limit the scope of workers’ claims for back pay –however this ruling will still have a sizable impact on employers.

The future

Looking forwards – as a result of the impact on businesses –the Business Secretary, Vince Cable, announced shortly after the ruling that a taskforce is to be set up to assess the possible impact of the ruling. He stated “[the] Government will review the judgement in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce…to discuss how we can limit the impact on business.”

Impact Assessment

The impact on certain businesses that rely heavily on employees working overtime could be costly and we may see a reduction in the use of businesses using overtime as part of their employment model – particularly those businesses in the seasonal industries, such as retail.

It is not clear whether purely voluntary overtime should be included for workers who otherwise have normal working hours.

A reference period of the last twelve working weeks is used to calculate holiday pay where a worker has no normal hours of work or where the worker has normal hours but their pay varies according to the amount of work done or the time of work.

It is now clear that the sum included in holiday pay for any overtime component should be assessed in the same way.  This will lead to the same worker being entitled to a different rate of holiday pay, depending on when they take their leave and will enable workers to take advantage of higher holiday pay rates, by taking leave after a period of overtime has been worked – it is likely that holiday taken after the Christmas season is going to cost an employer more than holiday taken before the Christmas season for example.

What next?

Although this ruling does raise some questions, one thing we can be confident about is that this is not the end of it. Leave to appeal has been granted on a number of issues, including in relation to the ruling on the meaning of a “series,” which will have a significant effect on the value of back-pay claims.

What should employers do now?

For now, employers must change their systems to ensure that holiday pay is correctly calculated going forward.  In relation to back pay, employers can rely on the current ruling in relation to a series, so if there is a gap of more than 3 months in any claim for a series of deductions, they can decide not to pay claims for the older deductions.  Given that they may in future become liable for these older claims, they may seek the opportunity to reach a settlement with workers in relation to a proportion of such older claims, in full and final settlement of their total potential claims.

Related articles