Overtime pay ruling: analysis - What the landmark decision on overtime pay means for employers - as published in economia

The EAT’s decision that employers must now include overtime when calculating holiday pay will come as a blow for employers. Going forward their employment costs will increase significantly and this could of course give rise to cost cutting measures, including redundancies which would be an unfortunate consequence of the ruling. However, the decision is not as bad as it could have been for employers. There is still some good news to be found in the EAT’s ruling.

First, overtime only has to be included when calculating holiday pay in respect of the basic four-week statutory holiday entitlement under the Working Time Directive.

Employers do not have to include overtime when paying holiday pay for the additional 1.6 week’s holiday provided by the Working Time Regulations. Nor when paying holiday pay for any additional contractual holiday entitlement over and above the basic statutory four week entitlement.

Second, subject to a successful appeal on this point, workers will not be able to bring claims for underpaid holiday pay if there has been a gap of more than three months between underpayments. This places significant limitation on how far back claims can go. For example, if a worker takes holiday in January and April and then does not take any further holiday until August. Assuming that he has been paid correctly whilst working the months of May, June and July, he will only be able to bring a claim that he was not paid correctly for August. He will have lost the right to bring any claim for underpayment for his January and April holidays.

Third, employers who do not pay overtime are unaffected by the judgment.

Employers should be looking to include overtime when calculating holiday pay for the basic four week statutory holiday entitlement, or at least make provision in their accounts for their potential liabilities if they decide to await a further decision from the Court of Appeal or indeed the Supreme Court should it get that far. The same applies to commission payments following the ECJ decision in Lock v British Gas earlier this year and to other sums intrinsically linked to tasks performed under the employment contract, such as productivity or attendance bonuses, should also be included.

Although the EAT gave leave to appeal to the Court of Appeal, it made it clear that any arguments that overtime should not be included in holiday pay calculations are unlikely to succeed. It therefore looks as though employers have no choice but to face up to this. The main issue for the Court of Appeal will be the question of how far back claims can go. Employers who have already started to include overtime and commission etc. when paying holiday pay have the best chance of protecting themselves against claims for back pay should the Court of Appeal overrule the EAT on this issue.

This article, written by Tina Wisener, was originally published in economia at http://economia.icaew.com/business/november-2014/overtime-pay-ruling-analysis