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18 December 2014

The holiday pay merry-go-round

Following a recent landmark case at the Employment Appeal Tribunal (EAT), when workers won the right to include regular overtime in holiday pay, employment partner Jo Davis hosted a round table event for employers to identify the options and give delegates the chance to see what others were doing to address the issue.  Here, she shares her findings.

The EAT ruled on three test cases against the engineering company Amec, industrial services firm Hertel and maintenance company Bear Scotland. Employees had said they consistently worked overtime, but that was not included in holiday pay, meaning they received considerably less pay when on holiday compared to when they were working.

The EAT followed recent European Court decisions that established that employees must be paid their normal pay when on holiday to ensure they were not deterred from taking holiday.  As such, any payment for tasks workers perform under their contracts must be paid during the four week period of leave provided by the Working Time Directive.

However, the decision has led to concern and confusion among businesses as to how to handle this from a practical standpoint, especially as the decision may be appealed.

1. What should be included in the holiday pay calculation?

It was generally accepted that regular overtime (regardless of whether it is guaranteed or voluntary) and commission should be included in holiday pay calculations. It is unlikely (but not impossible) that this position will change on appeal, especially given the guidance from the European Courts on this issue.

What constitutes “regular” will have to be considered on a case-by-case basis but the additional payments must be regular enough to be considered part of an employee’s “normal” pay.

The position is less clear regarding bonuses, although I suggested that annual discretionary bonuses which are paid to all employees irrespective of performance needn't be accounted for.

2. What is the best reference period?

While the UK has a 12 week reference period, it was agreed that a 12 month reference period provides a fairer outcome and less of an administrative headache.

3. Can you “break the series of deductions” by making one correct payment?

The EAT has prevented employees from bringing claims for underpaid holiday going back several years by stipulating that they can only claim for periods of backdated holiday pay where there has been a gap of not more than three months between the holidays for which the worker wants to claim an under-payment. This is complicated because the EAT suggested that the extra 1.6 weeks’ holiday provided under UK law (which doesn't attract the enhancement) is “additional” and therefore taken after the four weeks’ leave provided for under EU law.

By reaching this decision, the EAT closed off most claims for holiday pay dating back before the start of the year and so didn't have to address whether a one-off correct payment could break the chain of deductions.

4. Among the options discussed by round table members were:

a. Reducing the financial exposure of including overtime in holiday calculations by no longer offering overtime pay at a premium rate;

b. Annualising hours to include an amount for average overtime worked (a generally unpopular solution);

c. Negotiating out of current overtime provisions in contracts and increasing annual salaries;

d. Replacing overtime payments with time off in lieu;

e. Make a one off additional payment at the end of the year taking into account overtime and commission earned during the preceding year to reduce the risk of historic claims.

5. Is it best to be proactive or reactive?

The majority of delegates decided to wait and see the outcome of any appeal rather than take proactive steps to minimise their risk.

As we now know that Unite, who backed the employees, are not going to appeal the ruling on the "series of deductions" point, this seems to have been the right decision.

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