In a landmark Employment Appeal Tribunal case yesterday (4th November, 2014) it was ruled that overtime should be taken into account when calculating employee holiday pay. The decision is based on two cases, one brought against Hertel UK and another against BEARS Scotland, which are based on the UK’s interpretation of the Working Time Directive. Workers involved in these cases believed that the holiday pay calculation was less than it should have been as the voluntary overtime completed prior to the time off period should have been included.
According to The Federation Of Small Businesses, a total of 400,000 firms in the UK could be affected and they further state that this ruling is “unfair” for business owners. There are fears that many small business may not survive due to the backdated pay that could be claimed by employees.
It’s likely that the ruling will be appealed or referred to courts in the EU for clarification. Any new rules may not come into effect for several years however businesses should start to plan how they will deal with the additional financial strain potentially imposed.
Some businesses, such as John Lewis, have already set aside large sums of money (£40 million in John Lewis’ case) to cover the additional costs that this ruling will impose.
The recommended action from businesshr.com is as follows:
- calculate the amount of overtime (both voluntary and non-voluntary) and commission and other regular allowances (such as other premiums/travel time payments that are in excess of expenses reimbursement) that have been paid to your employees over the past year; then assess the effect of an increase in holiday pay if these are factored into the calculation for the first four weeks of each relevant worker’s holiday pay each year.
- budget for this if you have not done so already.
- tighten up on your record keeping procedures if necessary to ensure that records of working time and overtime are accurate, and also check whether your payroll system will be able to cope with calculating holiday pay in different ways.
- consider whether you will want to retain a “two-tier” holiday pay arrangement – with the first 4 weeks paid at a higher rate than the remainder.
- it’s probably best to wait before amending contracts or handbooks at this stage, but, if appropriate, you may wish to review your wording on overtime and remove any “requirement” to work this if in practice this is always worked on a voluntary basis.
- look at when holiday tends to be taken – this will help you to identify the period over which potential liabilities might extend. Do not dispose of your holiday records for previous years as these may help to establish which leave forms part of the first four weeks, and which does not – and therefore where any breaks in the sequence of underpayments occur. Employees who have left more than 3 months ago may not make a claim.
- calculate the likely cost of any backdated claims and start to set aside funds should you need to pay.
- consider your use of overtime – if this is regular, and if this ruling will create problems for your business, might you reduce your reliance on this by resourcing this by other means, or building flexibility into your contracts? (For example if there are troughs as well as peaks in workload you may want to build in the right to insist on time off in lieu rather than paid overtime, or to look at contracts such as annualised hours.)
- look at your employees’ amounts of outstanding holiday currently and consider your rules on the taking of this – you may be able to ensure a three month gap now between holidays which may limit your risk.
- consider all other premiums and allowances – are they serving their purpose? When you hold your annual pay review, would now be the time to buy out of some of them?
If you would like to learn more about how CIPHR can assist you in managing the potential financial implications of this ruling then contact us on 01628 814060 or online.