Holiday pay ruling: A looming and costly HR crisis
A landmark decision by the Employment Appeal Tribunal (EAT) this week was dreaded by many employers but it is not as bad as it could have been.
It is potentially the biggest issue facing employers this year and could have a similar impact to the equal pay claims of recent years. It could lead to a wave of holiday pay claims to Employment Tribunals and the result could even force some companies out of business.
However, the silver lining for employers is that the decision has restricted backdated claims which potentially could have stretched back 16 years.
Since 1998 most employers in the UK have calculated holiday pay without usually including payments such as working allowances, overtime, commission and bonus payments, unless the pay varies with the amount of work done or time of the work (shift work).
Earlier this year, the European Court of Justice ruled that commission should be included when calculating holiday pay. It agreed with a sales consultant who claimed he suffered financial disadvantage as his holiday pay was calculated without taking into account commission which made up 60 per cent of his total remuneration.
The issue is key for many workers heavily reliant on commission, including those in sectors like financial services, insurance and sales.
Since then employees have raised claims with the UK Employment Tribunal, including those who felt overtime should also be included in the holiday pay calculation.
The new decision by the EAT on a case (Bear v Fulton) has determined that voluntary overtime must also be taken into account when an employer calculates a week’s pay for holidays.
Very importantly, the Judge also decided that workers can make backdated claims, but only if it is less than three months since their last holiday, or last incorrect payment.
We can now expect a huge wave of claims coming forward now with potentially millions of people affected. In fact, many employers already have had claims made against them by significant numbers of employees pending this result.
Some larger employers have been anticipating this decision and have started negotiations with workers and their representatives on mutually acceptable terms. Some employers are likely to be able to come to some agreement with their staff, but others might find themselves in difficulty as they may not have the resources to make large payments.
Last year John Lewis reportedly paid out £40million to staff for backdated holiday pay because of a miscalculation; and which would allow it to curb future liabilities.
Our advice to companies it to look at how they calculate holiday pay to determine whether they will be affected by this ruling. They should then examine the cost of this to the business and how things will change going forward.
If they are affected, they need to work with staff and the trade unions so that acceptable solutions can be reached for everyone concerned.
Katy Wedderburn is a partner at leading Scottish law firm MacRoberts and is accredited by the Law Society of Scotland as a specialist in Employment Law.