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Insight

Overtime to be included in holiday pay calculations

Nick Thorpe
04/11/2014
This week has seen significant media coverage of an Employment Appeal Tribunal case concerning the inclusion of overtime in holiday pay calculations, with reports that businesses could face a This week has seen significant media coverage of an Employment Appeal Tribunal case concerning the inclusion of overtime in holiday pay calculations, with reports that businesses could face a potential bill running to billions of pounds. The case follows earlier decisions concerning the inclusion of other elements of pay in the calculation of holiday pay, such as shift premia and sales commission.

So, is your business at risk of a significant holiday pay bill? And if so, what can you do to mitigate that risk?

What is the issue?

In a nutshell, the cases concern the elements of pay that should be included in an employee's holiday pay calculation. In the past, many employers have taken into account base salary only when calculating holiday pay. However, the recent cases require a significant change in the way that employers calculate future holiday pay.

Employees may also seek to recover past underpayments by way of a series of unlawful deductions of wages, potentially going back as far as 1998, when the holiday pay legislation was first introduced in the UK. The costs could therefore be significant.

What types of pay should be factored into holiday pay?

Overtime and holiday pay

Today's decision provides some answers. The Employment Appeal Tribunal (EAT) has confirmed that 'non-guaranteed' overtime should be included in the calculation of holiday pay in so far as it relates to the 4 week entitlement provided under EU legislation ('non-guaranteed' overtime being overtime which an employee is required to perform if requested). However, it does not have to be included in the additional 1.6 weeks' leave provided under UK legislation.

The question of whether or not 'voluntary' overtime should be included in an employee's holiday pay calculation was not directly addressed by the EAT. The EAT also gave employers some hope in relation to the potential back pay liability, with claims for arrears of pay being out of time if there has been a break of more than three months between successive underpayments. However, permission has been given to appeal this point to the Court of Appeal.

Other payments

Today's decision follows earlier decisions which confirmed that shift premia and sales commission should also be included in the calculation of holiday pay. The current trend of cases also calls into question other elements of pay, including bonus payments.

What should employers do?

Many employers have been adopting a "wait and see" approach to this issue, but in light of today's decision and the publicity it is likely to attract, that approach is looking increasingly unsustainable and it is only a matter of time before employees start to challenge their holiday pay calculations, particularly with reports of some Claimant based firms running PPI-type compensation campaigns asking employees whether their holiday has been underpaid.

While the risk of significant 'back pay' claims may have been reduced by today's decision, employers should take steps to understand how these cases affect them. Employers need to identify whether they are at risk, review their pay structures and payroll operations and understand what options might be available to them to mitigate the potential costs.

How we can help?

We can help you to assess the impact of the recent cases on your business through our comprehensive holiday pay audit, calculate the costs and suggest appropriate risk mitigation strategies. This is an issue that cannot be ignored. It is not going away.

For more information on how we might support your business address these issues, please contact Nicholas Thorpe, or any of the other partners in the Employment and Pensions Group.

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