A court case concluded this week that could have lasting ramifications on UK employment law, as an Employment Tribunal ruled that overtime, commission and other additional payments may now need to factored into employee holiday pay.
It is important to note that exactly how employers will be required to enforce this decision has not yet been confirmed. Business Secretary Vince Cable will be setting up a task force to establish the impact this ruling will have on UK businesses.
What has happened?
The ruling yesterday (November 4th) by the Employment Appeal Tribunal (EAT) related to the Employment Tribunal case of Bear Scotland Ltd v Fulton (and conjoined cases). This follows previous rulings in 2012 and 2014 regarding changes to holiday pay based on ‘normal remuneration’ and commission payments.
The EAT has decided that non-guaranteed and regular overtime and other allowances must now be included in the calculation of a worker’s holiday pay, to ensure that workers are paid “normal remuneration”, or their typical average pay as part of their holiday entitlement. Whether this only applies to mandatory overtime as required by the employer or irregular or sporadic or voluntary overtime as well is yet to be determined.
It also looks like one of the certain allowances is for travel time to be included where there is a direct link between the payment and the tasks that a worker is required to carry out, and where the payment is made for a sufficient period of time.
These additional pay elements only need to be included when calculating the amount paid for the 20 days’ (4 weeks) holiday required by the Working Time Directive (WTD). The ruling does not apply to the additional 8 days (1.6 weeks) for the public and bank holiday holidays added under Working Time Regulations (WTR) or to enhanced contractual holiday entitlement. The EAT ruled that employees themselves will not be allowed to retrospectively choose whether a certain holiday fell under WTD or WTR.
If the periods of payment deduction have a gap of greater than three months between them, then the EAT has ruled that the Employment Tribunal loses its jurisdiction to hear claims for any earlier deductions.
What does this mean for your business?
This ruling has the potential to be a major blow for businesses, as employers may suddenly owe an arrears of pay that they had not previously accounted for. Businesses that do not offer overtime, commission or other allowances should be largely unaffected by the legislation, should it be confirmed.
What do we recommend?
If you are an employer who makes additional payments above basic salary we recommend that you consider the following until further clarification is given:
Take stock of your current trading year to see how you may be affected
Consider the administrative burden of this and decide whether you will only pay on the 4 weeks, the 5.6 weeks or the enhanced contractual holiday entitlement
Ensure that correct pay-outs are made going forward
Set aside a reserve amount to cover both new and potential historical pay-outs
Factor the decision into pay reviews and new starter salaries
Review existing and new commission structures
Limit the amount of overtime offered if possible and consider alternatives (casual/part-time staff)
There are still facets of the case to be determined, including the right to historical pay, which the EAT has given leave to appeal. When there is established law and clearer guidance in place we will update you accordingly.
Should you wish to discuss how your business may be affected by this ruling, please do not hesitate to contact your HR Solutions consultant today.