Holiday Pay and Paid Overtime

Welcome to this HR Blast. Given last week’s ruling, holiday pay has been making press headlines, but at times the messages have been quite confusing. We therefore thought you would value a summary. This should enable you to identify if this affects you and if so, what to do about it.

Holiday pay – what was the previous position?

  • EU law entitles workers to 4 weeks holiday pay a year.
  • The EU has previously provided no details about how to calculate it.
  • The UK has to date said it should be calculated at an employee’s basic rate of pay so additional payments for overtime and commission haven’t been included.
  • A few employers though have paid over and above what the law required.
  • Prior to the ruling on 4/11/14, the European Court of Justice (ECJ) had already concluded that employees would be entitled to regular extra payments like commission and overtime when taking holiday. This is now binding on UK business. Therefore it was only a matter of time before holiday pay calculations were tested in UK courts.

What’s the new ruling on holiday pay and what does it mean for me?

  • The ruling on 4/11/14 was only in relation to the overtime payments that form part of an employee’s ‘normal remuneration’ i.e. regular non-guaranteed and compulsory (or guaranteed) overtime, which refers to overtime that an employee must undertake – i.e. they cannot refuse to undertake the overtime.
  • The ruling confirmed employees are entitled to receive pay for holiday accrued on non guaranteed and compulsory overtime which forms part of an employee’s normal remuneration.
  • Voluntary (paid/unpaid) overtime is not included in the ruling (voluntary overtime refers to working occasional overtime on a voluntary basis, when employees have no obligation to work it).
  • The guiding principle behind these decisions is related to Health and Safety. This is on the basis that if an employee does not receive their normal remuneration while they are on holiday then they are dis-incentivised to take the holiday, which is not conducive to their Health and Safety.
  • In the UK, employees are entitled to a minimum of 28 days holiday. This includes 8 days bank holidays. But this ruling only covers the basic 20 days. There is no requirement to apply this ruling to more than 20 days holiday.
  • Lastly, the good news is that it doesn’t look at this stage as though employees will be able to claim for back dated payments prior to this calendar year. The current rules only allow employees to make a claim within 3 months of the last unlawful deduction, or last series of deductions. The EAT‘s judgement wording suggests that an employee wouldn’t be able to claim further than the series of deductions within the current holiday year.

Although there has as yet been no ruling in the UK on commission based pay, we are expecting a ruling in the UK Courts before the end of the year. It’s pretty much a certainty that the UK rulings will follow in the steps of the ECJ’s conclusion, so it’s definitely worth factoring in commission based holiday payments into your budgets for next year!

So what are your next steps?

Identify if this applies to some or all of your workforce. If it applies… consider how you want to implement this in your organisation i.e.

  • do you want to re-calculate holiday pay for the whole of your current holiday year (which is the safest route to take if you want to avoid any claims) or
  • start the new method of calculation from the 4th November 2014 or
  • start from the next holiday year (this last option is rather risky given that employees will be expecting to see an immediate change to their overtime payments – and could in most cases legitimately claim for their holiday pay for this year).

You must also…

  • Consider setting out a policy (or tweaking your existing holiday policy) to make it clear how you will calculate a weekly wage when someone is on holiday e.g. will you take average hours worked over the last 12 weeks and multiply it by their basic rate? Getting this right is critical, so get some good advice and the Jaluch team are able to support if required.
  • Consider in future whether the extra payments are sustainable e.g. is it worth using bank or agency staff to cover overtime instead? Is it time to review your standard employment contracts around overtime working requirements?
  • Consider how you will tackle commission based holiday payments (if you don’t already include commission in holiday pay). This might not be as simple as it sounds once you start looking into it, so please do get advice.

What affect will this have on businesses?

  • Federation of Small Businesses had estimated that a third of small businesses pay staff for overtime.
  • Government estimated that about one sixth of workers do overtime – which means about 5 million people could be affected by this ruling.
  • EEF estimated this could add about 3% to their wage bill.
  • Remember though that this does only apply to required overtime, not voluntary overtime.

Unions have of course welcomed this change but the good news is that on the 4th November, the Government announced that they would look into ‘limiting the impact’ of the holiday pay ruling… so watch this space!

And finally…

This is a very complex subject and we recommend that if this ruling appears to affect you, that you take the time to get some sound legal advice and take a fresh look at the wording in your employment contracts around holiday pay and how that is calculated. You will probably need to review the wording and formally re-issue it to staff as you would any other contractual change.

Please call us on 01425 479 888 if you would like some support.

Are your managers feeling that all this legislation is becoming a little overwhelming? How about you roll out some training on topics like managing absence, managing discipline, and managing performance. We can either deliver training on these topics for you or, if you want a more cost effective solution, take a look at our training kits.

The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.


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