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It’s official - Holiday pay should include overtime!

It’s official - Holiday pay should include overtime!

For some time there has been debate whether an employee’s holiday pay should reflect only their contracted hours; or, whether it should reflect their average take-home pay, including overtime.

For example, let’s take an employee who is contracted to work 35 hours per week, but usually works at least 10 hours overtime. When they take holiday, should they be paid the equivalent of their contracted 35 hour week? Or, should they be paid the equivalent of 45 hours per week?

The argument being, if an employee is used to being paid for a 45 hour week, why should they receive less money when they are on holiday. Employees argue this makes them reluctant to take holiday, as they lose out financially. Even more concerning, employees on lower wages have not taken holidays in the past, because they need the overtime pay in order to make ends meet. In short, they could not afford to take holiday.

It is clear that many employees rely upon overtime, in order to make ends meet. It is precisely this issue which has led to the change in the law. It is argued that employees should be able to enjoy the same level of pay whilst on holiday.

The Employment Appeal Tribunal has today confirmed that “normal non-guaranteed overtime” should be included in holiday pay.

It seems that this will be calculated using a reference period of 12 weeks. An employee’s weekly nett pay, will be calculated by taking the average of the previous 12 weeks’ pay, including overtime. It is that figure which should then be used to calculate an employee’s holiday pay entitlement.

It is very important to note that this provision only applies to 4 weeks’ leave; not the statutory 5.6 weeks.

This ruling will almost certainly result in many employees claiming for arrears of holiday pay. They will argue that whilst they have been paid some holiday pay, they have not been paid the correct amount; therefore, they will claim for the balance of what their employer has not paid.

It is currently unclear how far back an employee can go when claiming arrears of holiday pay. Today’s ruling suggests an employee will not be able to claim arrears of pay if there has been more than 3 months between each underpayment.

For example, if an employee claims they were not paid the correct amount of holiday pay(because it did not include their normal overtime) , they will not be able to claim retrospectively, if the last period of holiday took place more than 3 months ago.

For example, if an employee brings a claim in the Employment Tribunal in November 2014 for arrears of holiday pay, but their most recent holiday prior to that was in February 2014, they will be unable to claim for the February period; given it was more than 3 months ago. This is currently unclear and may be open to interpretation by the tribunal Judge.

There is also the potential to bring a claim for unpaid holiday pay and arrears of pay as a breach of contract claim in the County Court. Once again, the law is uncertain in this area; however, case law does exist to support this potential alternative.

One thing that is clear, is that the financial implications of this ruling could be colossal. The director general of the Confederation of British Industry, John Cridland, provided a stark warning of the potential ramifications in a BBC article:

“This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses.”

This warning has clearly had the desired effect as within hours of the judgment being released, Business Secretary, Vince Cable, announced the setting up of a taskforce to asses the possible impact of the ruling. Mr Cable said the following:

“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 taskforce of representatives from government and business to discuss how we can limit the impact on business…”

It is highly likely that this ruling will be appealed in due course; however, until then, despite the uncertainty and panic facing employers, we suspect the Employment Tribunal could be very busy dealing with claims for arrears of holiday pay.