CNM Advisory guest blogger Jane Williams provides an urgent Employment Law update regarding holiday pay.
A recent case may be very relevant to your business so we have issued this case summary to urgently address this issue for you. Do you pay overtime to your employees whilst paying just basic pay whilst they are on holiday? If so, then this decision affects you. Have you done so, in the last 6 years? If so then this decision affects you. We have already received some clients seeking advice regarding the decision reported on the national news and so we have reviewed the decision in order to provide you with some guidance on how this affects you.
The Employment Appeal Tribunal decided yesterday that when an employee takes their initial holiday (up to the point of the initial statutory minimum of 20 days per year for a full time employee) they are entitled to be paid what they would have received had they been at work. The logic is that they should not be worse off for taking holiday. They have interpreted that to mean that the employee should receive an average sum for overtime they work, even if on the particular week they are on holiday there won’t be any overtime. Some employers already pay an element in their holiday pay to cover overtime. Where overtime is compulsory then most employers already pay holiday pay that includes the overtime being missed but this new ruling relates to overtime worked voluntarily. Unfortunately the decision did not detail how to calculate what the payment would be but considered opinion suggests it will be the average overtime worked in either the 12 months prior to the holiday or 12 weeks prior to the holiday. That uncertainty will not help and further guidance is expected from the Government on that issue. In addition, there is the risk that where employers have, to date, not paid holiday pay to include overtime then employees could claim unlawful deductions. Any gap of 3 months either since the last holiday, or between holiday periods, will break the chain and stop the remainder being claimed as “unlawful deductions”. However, the employees could still make a breach of contract claim for under payments made in the last 6 years. These laws come from the Working Time Regulations and contracts of employment have those benefits granted by the regulations implied into the contracts.
Will it affect my employees?
It will not affect employees who are salaried and are contractually required to work extra hours for no additional payment. If your employees sometimes work paid overtime, then does their holiday pay include an appropriate payment to cover overtime? If not, then you must start paying that as from now or stop offering overtime. What about holiday already taken and paid at a lower rate? Should I pay the shortfall? As far as back pay is concerned, if your employees do nothing for the next 3 months and don’t take any holiday then they will lose the right to claim back pay as unlawful deductions but they could still go to the county court to claim the sums. However, leave has been granted to allow the parties to appeal the decision to the Court of Appeal so this is not over as yet. It is possible the ability to claim back payments may be changed or the way it is calculated will be clarified. It is also reported that the Government are setting up a task force to look into minimising the effect of this decision so the decision on whether to pay employees for any failures to make overtime payments with past holiday pay is ultimately your decision unless or until your employees pursue the matter.
If, as a result of this decision, you start paying extra holiday pay, it would be sensible to inform all employees that any extra payments are being made based on current understanding and pending any appeal to the Court of Appeal and future holiday payments may revert to the lower rate. I would not suggest you can recoup the payments made but try not to commit to always paying the higher rate in case the case changes at appeal stage or due to a future case. If you need assistance to communicate how the holiday payments will change to the employees, then let me know. We do not know as yet if the parties will appeal.