A recent decision by the Employment Appeal Tribunal has implications for employers who do not include regular overtime in holiday pay.

Many employers in the UK pay holiday pay at the basic rate of pay for an employee’s normal weekly working hours. Overtime payments are not included.

Prior to this judgement the UK Government and many employers have interpreted the European (EU)Working Time Directive as requiring only basic pay excluding overtime to be paid when an employee takes annual holiday.

The Tribunal judgement turns all this on its head.

The three cases heard by the Tribunal were against the engineering company Amec, a maintenance company Bear Scotland and industrial services company Hertel. The employees argued that as they regularly worked overtime they were paid less than normal when they took their holidays. This was contrary to the spirit and intention of the EU Working Time Directive which was designed to encourage employees to take their statutory holidays without fear of them losing money.

The good news for employers (if there is any) is that the EAT ruling, which is currently being appealed, restricted back pay claims to those that applied to the last three months, unless the failure formed part of a “series of deductions” ending within that three-month period.

So what should employers do?

If employers decide to include overtime in holiday payments going forward they will limit claims to any holiday taken in the last three months. Taking this decision will increase their ongoing payroll costs though as this will be contractual.

Alternatively they could wait until any claim for back pay is submitted and pay only if they have to. This could take a while and gives employers time to see how the legal position pans out.

The Government has drafted regulations would limit claims for unlawful deductions from wages under the 1996 Employment Rights Act, made on or after 1 July 2015, to two years. Claims for certain categories of payment including statutory maternity pay (SMP), statutory sick pay (SSP) and guarantee payments are not affected. The months until July will act as a transitional period during which workers can continue to make claims under the existing arrangements. In the meantime employers may wish to consider changes to working practices which could reduce the exposure to overtime payments in holiday pay. Some examples are:

  • Reducing or stopping overtime
  • Employing more part time staff
  • Offering time off in lieu instead of overtime pay
  • Introducing flexible working or staggered hours
  • Improving productivity during normal hours
  • Creating “buffer” stocks to meet peak demand
  • Sub-contracting work
  • Outsourcing work

Ironically this judgement may have provided an incentive for some employers to review whether present levels of overtime are necessary and to look at cost-saving alternatives. Reducing or removing unnecessary overtime will provide cost savings throughout the year not just in relation to holiday pay.

It could work against employees if employers can reduce the need for overtime.

If you have any queries on the information provided in this newsletter please contact Rob Grinter, Director, Mark David HR Ltd on 07792 602 142 or email:rob@markdavidhr.co.uk.

Mark David HR

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