The rejection by the Employment Appeal Tribunal (EAT) of appeals by three employers against judgements that held some people working overtime could claim for additional holiday pay, has received a lot of media attention, but for UK businesses the position remains unclear, says lawyer Abigail Halcarz.
Abigail Halcarz
In a much-anticipated and long overdue judgment, the Employment Appeal Tribunal (EAT) has ruled that overtime should be counted in “normal remuneration” when calculating holiday pay. The EAT also ruled that workers can make retrospective claims, but these will only be allowed for a limited period.
This ruling is expected to have widespread consequences for all organisations that have made or currently make overtime payments to their staff, as they will now have to factor in non-guaranteed overtime when calculating holiday pay. Employers should note that this appears to relate only to the four weeks holiday entitlement under the Directive.
Employers will take some comfort from the fact that the EAT has limited the period for which claims can be backdated, although the limit will only come into effect where there has been a three-month break between deductions (ie between holidays). There will undoubtedly be situations where this is not the case, for example, where a worker has taken holiday at regular intervals throughout the year.
What’s more, although it is unlikely, it does appear there is nothing to stop a worker bringing a claim for breach of contract in the civil courts, in which case the time limit would be six years from the date of the breach.
Due to the likely effect this ruling will have on UK businesses, business secretary Vince Cable has announced that a new task force has been created to assess the impact. In a press release following the judgment, he said: “Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a task force of representatives from government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”
"Given the significance of the judgment to the three businesses originally concerned and all organisations in general, it seems highly likely the matter will be referred to the Court of Appeal. This would ensure that a final decision on the matter could still be many years away and only add to the confusion."
Given the significance of the judgment to the three businesses originally concerned and all organisations in general, it seems highly likely the matter will be referred to the Court of Appeal. This would ensure that a final decision on the matter could still be many years away and only add to the confusion.
But for those organisations concerned at the possible consequences, are there actions they can undertake in the meantime to mitigate the risks?
It makes sense for employers to assess their potential liability for historical claims and to ensure they budget for what could be a worst-case scenario.
Organisations could choose to settle potential claims with employees, but this will depend on the number of staff involved and will take time to calculate if the settlements are to reflect each employee’s exact entitlement.
Employers could make a notional overtime payment to staff to break the series of deductions. Although this could trigger the three-month time limit for making a claim for historical underpayments, it could arouse suspicion, which could lead to claims, particularly in unionised workplaces.
Employers may also wish to impose a suspension on holiday for three months, but this is likely to lead to discontent in the workforce and also unmanageable holiday levels at other times of the year.
A more drastic option would be for employers to cease to offer overtime to workers, but this would not prevent retrospective claims and is likely to have disadvantages for both employers and employees.
Subject to the outcome of any appeal, in future employers should change their policies to include overtime in holiday pay calculations. This will put an end to the series of deductions with regard to unlawful deduction of wages, so employees would have to make a claim within three months of the last deduction, otherwise they will lose the ability to do so. However, employers may need to consult with trade unions first.
Despite the speculation, until we know whether the ruling is to be appealed, the position remains unclear. Although one of the original claims was settled before the matter went to appeal, the majority of employers will choose to wait and see what happens, with many considering that any changes they make now will be insufficient or unnecessary. Employers acting now though have the chance to limit the number of claims.
While the situation for every organisation will be different, the right advice could help avert a significant expense and huge administrative burden at a time when almost all businesses are hoping for sustained growth, with many offering employees increased overtime opportunities.
Abigail Halcarz is an employment solicitor in the commercial group at law firm SGH
