Holiday pay – a sigh of relief for employers?

The long awaited Employment Appeal Tribunal decision in respect of holiday pay has today been handed down. The central question determined by the EAT was whether or not holiday pay should be calculated on the basis of basic salary alone or if it should include an additional payment to represent the overtime that is usually done by the employee.

The answer from the EAT is that holiday pay should include a payment to represent the overtime usually worked, but lost because the individual was on holiday, for the 4 weeks annual leave taken under the Working Time Regulations. If we take as an example an employee who is paid a basic salary of £10 an hour for 35 hours a week, that is a weekly salary of £350. If however, that employee, on average, does at least 15 hours a week of overtime at a rate of £15 an hour, the impact of that overtime means that the employee’s normal weekly remuneration is £575. Traditionally, if that employee had been on holiday for a week they would have been paid £350 which is their basic rate of pay. The impact of this Judgment is that for the Working Time Regulation element of their holiday, they should in fact be paid £575 when they are off for a week’s holiday.

The real impact of this Judgment however comes in the EAT’s surprise decision on whether or not backdated claims can be made by employees in respect of an underpayment of holiday in the past. The concern for employers was that employees could lodge backdated claims possibly as far back as the start of their employment or 1998 when the Working Time Regulations were introduced, bringing those claims as a series of unlawful deductions of wages.

The EAT has determined that where there is a ‘gap’ in holiday taken by an employee of three months or more, that breaks the ‘series’ of deductions. This effectively prevents employees from lodging substantial backdated claims which is a welcome relief for employers.

The EAT has granted the employees involved, leave to appeal to the Court of Appeal particularly on the last question of how far back, backdated claims for holiday can be claimed and we will keep you updated in relation to that. In the meantime, employers should take urgent steps to address the calculation of holiday pay going forward because, even if an appeal against this decision is successful (which will take many months), the fact that from today onwards the employer had been paying the right amount of holiday would mean that there was no longer a ‘series’ of deductions from holiday pay and employees would have substantial difficulties in launching a claim for backdated claims when the Court of Appeal decision comes out.

Questions remain as to whether or not substantial backdated claims could be brought in the County Court on the basis of a breach of contract claim where the limitation period is 6 years.

To read the full guide on this issue please click here.

For any help in either pursuing claims or taking preventative action please contact Linky Trott on linky.trott@www.edwincoe.com or on 0207 691 4000.