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Enhanced Holiday Pay
A landmark judgment from the Employment Appeal Tribunal (EAT) to include overtime in holiday pay with potentially costly implications for UK businesses was announced towards the end of last year. It attracted a lot of publicity because it could affect up to 5 million workers according to government figures and confirms that elements of remuneration such as regular overtime and commission must be included in the calculation of holiday pay.

The judgment concerned the calculation of holiday pay in three cases: Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Wood and others and Amec Group Ltd v Law and others.

The decision only applies to the minimum 4 weeks required by the European Working Time Directive (‘EU leave’). The additional 8 days required by UK law (‘UK leave’) as well as any further leave provided by employers are not included so the latter could be paid at a different rate – but that could be an administrative nightmare and employers may decide that the simplest approach is to use the same calculation method for all leave payments.

So what are the implications of this ruling?

If someone regularly works overtime such that their “normal” pay is regularly higher than their salary or standard hourly rate, then that should be included when calculating the rate for annual leave. In these cases you will need to calculate the average pay over the 12 weeks prior to the period of leave being taken (or I would suggest using 3 months if that would be easier from a payroll perspective). Note that if someone only does overtime “once in a blue moon” then their “normal” pay is only the rate they get most months and you would discount the unusual payment and pay their holiday at the usual rate. This approach may produce arguments as to when an irregular overtime pattern becomes “normal” and so some employers may choose to apply the new averaging rules to everyone to avoid that situation.

Many employees may see this as an opportunity to claim for underpaid leave – and employers were worried that this could go back potentially to 1998. However, the ruling said that claims can only be made where there has been a series of deductions from pay and there is a gap of no more than three months between each deduction in the series. There are likely to have been gaps of three months or more where employees took no holiday at all and some holiday taken each year will have been paid correctly as it is ‘UK leave’ rather than ‘EU leave’. Practically, this means that in most cases employees are unlikely to be able to claim back pay going back further than about 12 months.

To deal with this problem the Government is putting in place some legislation due to come into force in July that will limit any back pay claims to 2 years – but some employees might put in claims before that becomes law. For example, if they take one day’s leave every month, it could be difficult to see a break in payments for some years!

If you have any questions about what you need to do to ensure that you are paying your employees correctly for their annual leave, speak to your payroll provider or contact Cherington HR for further advice.
Posted on 19 Nov 2016

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