What businesses need to know about holiday pay ruling

Newspaper reports of the recent Employment Appeal Tribunal decision missed out some crucial points and the devil is very much in the detail.

1. The higher holiday rate pay only applies to the first four weeks’ paid holiday each year (for technical reasons).  Employers can continue to pay basic salary for any additional annual leave.

2. Employees are very unlikely to bring large historic back pay claims.  The court decision makes it clear that if there was a three month gap in holiday underpayments then the employee cannot claim further back in time so the reality is that this affects holiday pay going forward and employers are not as likely to face large back pay claims as the publicity suggests.

3. The case related to non-guaranteed overtime.  This is overtime that the worker was required to work but the employer is not obliged to provide.  The position in relation to purely voluntary overtime (where there is no obligation on either side) is less clear.  It is possible that tribunals will interpret voluntary overtime as part of normal remuneration if there is a settled pattern of overtime working which has developed over a sufficient period of time. If this is the case, our advice would be to include this in the four week holiday pay calculation.

4. Leave to appeal has been given in relation to the issue of back pay claims and it is this area that puts employers at most risk. There is now a compelling business case that businesses should include overtime within holiday pay going forward rather than wait for the outcome of any appeal.  This will enable employers to protect themselves against the risk of the back pay point being reversed by the Court of Appeal.

5. Other steps that employers might consider are limiting or refusing holidays after periods of high overtime or using agency staff to cover periods traditionally covered by overtime.