Holiday Pay practical guidance

  • Posted

Posted 18/11/2014

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On 4 November, a landmark decision was made by the Employment Appeal Tribunal (EAT) in relation to holiday pay that is likely to have wide ranging implications for employers.  We have discussed this decision with a number of businesses in East Anglia and as a result, have put together the following guidance on what options employers have who are affected by this decision.

In summary, it has been decided that non-guaranteed overtime should be included when calculating holiday pay. It was also decided that the ability to recover historic underpayments is limited and that if there is a three month break in underpayments, this will break the chain for the purposes of any unlawful deductions from wages claim. Earlier cases decided that commission and guaranteed overtime should be included in the holiday pay calculation.  We wait for a definitive ruling on whether voluntary overtime should be included but there is a strong possibility that it will be.

It will therefore be sensible for employers to audit how much they pay workers during periods of holiday, whether workers are likely to be aware of this issue and what holiday records you keep.  It is likely that this decision will affect a large number of employers with employers who operate a commission structure or pay overtime most at risk.  Employers affected will need to consider what action to take next and we consider that there are the following main options open to employers:


Do nothing but look out for developments in this area

  • This approach may work where there is significant cost associated with changing the amount paid for holiday as it will delay when payment is due and if workers leave and do not claim for their holiday, payment will never become due.  Also, some workers may not be aware of their rights in relation to this issue. Three months may lapse between underpayments although as we are approaching the Christmas holidays it seems likely that many employees will take holiday over this break giving rise to a new underpayment.
  • It is a risky approach as liabilities are highly likely to increase in the future in line with liabilities growing over time and the fact that liability may be increased when an appeal of the EAT’s decision is heard.

Pay correctly in the future

  • If you only have a small amount to pay in order for the payment to be correct, it may be sensible to change the amount paid for holiday going forwards.
  • However, this does flag the issue to workers and if the decision is changed on appeal, you may be paying more than what you need to. If the decision is changed and an employer reverts back to what they were originally including in holiday pay, this could be an unlawful deduction from wages.

Settlement of outstanding claims

  • It is possible during employment to settle claims for underpayment of holiday and then change the amount that you pay going forwards.  For cautious employers, this will give certainty going forwards.  It also sends out a good message to employees that the employer is doing something to rectify the situation.
  • It does mean that you may be paying either too much or not enough dependent on the further appeal that is being made.

And finally…

  • You could decide to break the chain of historic underpayments by for example preventing all employees from taking holiday for a three month period.
  • However, this is likely to send out a very bad message to employees and possibly the media (dependent on size of employer).  Therefore this approach is unlikely to be feasible.

As stated above, we still await a further appeal of this matter.  Therefore, you should keep a watch on this developing area of the law.  Our employment team would be pleased to speak to you about your individual circumstances to discuss the best option for your organisation.  We would also be pleased to discuss this issue with any groups of employees who have concerns about this matter. Contact us on 0330 404 0773.


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