Holiday Pay Judgement

There has been a development in Employment Law this week which, as you may have heard or read, changes how employers need to calculate holiday pay. The Employment Appeal tribunal ruled that it is wrong for employers to only take into account basic pay when calculating how much certain employees should receive when they are on annual leave.
The dispute arises from the Working Time Regulations of 1998 which stated that employees should have leave and be paid for it. Its wording was that employees should be paid pro-rata their “normal” pay for annual leave.
In a ruling earlier this year the European Court of Justice held that normal pay should not be restricted to what is in an employee’s contractual rate of pay. Following this workers at 3 road maintenance companies and engineering firms challenged their employer’s calculation of their holiday pay. They said holiday pay should be based on average earnings and not their basic pay. The employees won their cases at the Employment Tribunal and the employers appealed. At that stage the ruling was not binding on other companies.
On Tuesday the Employment Appeal Tribunal ruled in the employees favour setting a precedent for how holiday pay will now be calculated. Workers are now entitled to be receive a sum of money to reflect normal non-guaranteed overtime as part for their annual leave payments. The judgement applies to employees who are required contractually to work overtime as and when necessary (overtime an employer is not obliged to offer but employees are required to perform), yet are not paid for these extra hours when it comes to holidays (extra hours can include paid travel time). Voluntary overtime, even if regular, is not protected AT THIS TIME.
The re-calculation of holiday pay only applies to the minimum 4 weeks holiday required by EU law and not the additional 1.6 week provided by UK regulations or any discretionary holiday on top of that. The tribunal ruled that workers can only make back claims if at the time of their claim it is less than 3 months since their last holiday or there has been three months between holidays.
Technical issue – the EAT rules that the Working Time Directive of four weeks holiday pay covered by this judgement are taken FIRST in any holiday year. So even if someone has recently been on holiday they may have used their four week guaranteed holiday earlier in the year i.e. beyond three months ago.
What is the impact for us today November the 6th?
Employers need to quickly establish their possible exposure, especially as there is a retrospective element (3 months). Establish who would be affected and based on holidays taken, calculate any shortfall in holiday pay in case of a request for back pay: keep records to ensure complaints will be properly addressed and cases defended if necessary.
It is anticipated that there might be an appeal to the Court of Appeal by the employers (who are backed by the government) to have the decision overturned. There is more likely to be an appeal by the Employees to have the ruling that employees can only go back three months overturned so that all underpayments for the last 12 months (in alignment with a previous ECJ ruling) or even back to 1998 should be capable of being claimed. Also Vince Cable is on the case and has set up a “working party” to explore how the impact of the judgment can be minimised. So that’s alright then.
At the moment there are many unanswered questions which may take further court judgements to determine: what constitutes regular overtime; will the ruling apply to “voluntary” overtime and if so how is this defined and how it is proved?
Technically employees can lodge claims now in respect of their August holidays but currently the tribunal fee system will exclude them from claiming as the fees are greater than any amounts owed.
In many ways at this point in time it is a victory for employers as it has prevented employees claiming 16 years back pay (which was the outcome feared). It does herald a change going forward (and for the last 3 months) and gives certainly for the calculation of holiday pay for some employees. However, it is probably the first step towards eventually all pay regularly received (including overtime whether contractual or voluntary / commission) being included in the calculation for holiday pay.
Want to know more with the approaching Christmas Holidays, contact Searchlight Employment Law Solutions at legal@searchlightels.ukor telephone 07861 309 729and ask for Jane.






