New rules on overtime and holiday pay

by | Feb 18, 2015

Employers are being advised to review their employee holiday pay arrangements, following a recent landmark Employment Appeal Tribunal ruling that overtime should be taken into account when calculating holiday pay.

The ruling

Until recently, it was generally considered that only basic pay and overtime that was guaranteed to be paid counted for the purposes of calculating holiday pay. However, the Tribunal found that under the UK Working Time Regulations (WTR) holiday pay must also include pay for non-guaranteed overtime.

The ruling applies only to non-guaranteed, compulsory overtime – ie, overtime which an employee is contractually required to work but which the employer does not promise to offer, as opposed to overtime that is undertaken voluntarily.

The ruling applies to the first four weeks of holiday in a given holiday year, as provided under the EU Working Time Directive, and does not take into account any additional holiday provided under the WTR or an employee’s contract of employment.

The likely impact

Up to five million people currently work overtime in the UK and the ruling could potentially impact on many businesses. While it may yet be referred to the Court of Appeal, experts believe that the underlying principle is unlikely to change.

Furthermore, following the ruling businesses could also be vulnerable to claims for additional holiday pay to cover previous periods of compulsory overtime, although the Government has since announced new rules meaning that from 1 July, holiday pay claims can only be backdated for a period of two years. Until that date, workers will be able to make claims under the existing arrangements.

This is not the only case on holiday pay that has found its way to the courts. A recent European Court decision held that commission payments constituted an intrinsic link to an employee’s tasks he was required to perform. The payments therefore should also be included when calculating holiday pay.

Protecting your business

In the light of these recent rulings, business owners are advised to review their holiday pay arrangements with a view to minimising the potential financial impact of the changes. Some of the steps you may wish to consider taking could include:

  • making appropriate adjustments to ensure that compulsory overtime is included in calculations for holiday pay
  • considering the potential impact of any potential claims for past unpaid holiday
  • reviewing employment contracts to allow for voluntary overtime, as opposed to non-guaranteed overtime
  • employing alternative staff resources, such as agency staff, to cover overtime needs.

This article is for general information only and you are advised to seek professional guidance before taking any action. 

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