A ruling at a recent Employment Tribunal Appeal case could lead to claims by hundreds of thousands of workers who do overtime.The ruling is the latest development in a case concerning the inclusion of other elements of pay in the overall calculation of holiday pay, such as sales commissions.
In the past many employers have only taken into account an employee’s base salary when calculating holiday pay. But the recent ruling will dramatically change the way employers calculate future holiday pay. The move could also cost businesses a substantial amount of money, as potentially an employee could seek to recover past underpayments dating back to 1998, when the legislation for holiday pay was first introduced in the U.K.
There are a number of types of pay that should be considered when calculating holiday pay.
The EAT (Employment Appeal Tribunal) have confirmed that overtime which is “non-guaranteed” should be included in the overall calculation of holiday pay. Non-guaranteed overtime is, in effect, overtime that is required by the employer if requested. Please note that the decision has a positive slant for employers, in that the additional elements only need to be included in holiday pay for the 4 weeks of annual leave guaranteed under EU law, and not the additional 1.6 weeks required under UK law (or any additional contractual holiday).
This decision also encompasses Sales Commissions and Shift Premia payments along with the complicated issue of bonus payments.
Back-Date risk reduced… for now
Some relief can currently be derived for employers relating to backdated holiday pay in that the Employment Appeal Tribunal’s ruling on this issue will make it difficult for most employees to backdate their claims by more than a few months at most. It is to be noted, however, that trade unions who have backed the case have permission to take this point to the Court of Appeal, so any relief may be short-lived.
What Happens Now?
Our advice is to not sit on your hands and expect this to go away, as this issue will inevitably rumble on. Although the current risk of backdated claims has been reduced with the latest ruling, the risk of the Court of Appeal adjusting the ruling in favour of employees is a possibility. Also, when the courts ruled in favor of the repayment of Mis-Sold PPI hundreds of claimant companies were formed and the same could also happen based on this ruling.
Therefore, as an employer, you should take steps to understand how this ruling will affect you. You should understand the risks, review your pay structures and payroll operations, and look at the options open to mitigate the losses.
If you require any further information relating to this important ruling, please contact the WHA payroll department.