Businesses Hit by Overtime Ruling

Today’s high profile legal rulings concerning how holiday pay is calculated will set a precedent for many similar claims in the coming months and have a devastating impact on the future on thousands of UK businesses - says a leading employment lawyer.

According to national law firm Irwin Mitchell, the Employment Appeals Tribunal’s (EAT) decision to uphold claims that holiday pay should include overtime, is likely to lead to a flood of new claims and unaffordable back pay awards which could run to millions of pounds.

The uncertainty about future claims for UK businesses may be so great that some firms could stop paying overtime altogether and also hold back from awarding pay rises to staff in 2015.

The decision in the cases of Wood vs Hertel UK and Fulton vs Bear Scotland, relate to how holiday pay is calculated and the way in which the EU’s Working Time Directive (WTD) is interpreted in the UK.

Currently under the WTD, employees are legally entitled to four weeks’ holiday pay a year, however there has been little in the way of guidance on how it should be calculated.

In the UK, many employers calculate holiday pay based on basic salary only, and exclude elements such as overtime and commission from the calculation.

Expert Opinion

There was considerable concern that today’s decision could lead to thousands of claims for backdated holiday pay, possibly going back 16 years. This looks to be unlikely because the Employment Appeal Tribunal (EAT) appears to have shut down the argument that employees could back date claims on the basis that they had suffered a series of deductions from their wages when taking holiday albeit there remains some uncertainty as to what denotes a ‘series’ and how this can be broken.

"Basically, it appears that if there is a gap of more than three months in any alleged series of deductions, the EAT loses jurisdiction to hear claims for the earlier deductions. It appears as though the Appeal Tribunal has accepted that including overtime in the holiday pay calculation only relates to 20 days holiday required under the Working Time Directive and not to the additional eight days provided under UK law. This means it is arguable that employees who took their full entitlement could not claim that they suffered an unbroken series of deductions as they would need to do to go back and claim deductions over a long period of time.

"What the judgment also doesn't answer is whether an individual can bring a claim for breach of contract, and it is likely that this point will be litigated as potentially employees have six years to pursue a civil claim. It also remains silent on how the payments should properly be calculated, for example, whether it should be over a reference period of the previous 12 weeks prior to the overtime being taken such as in the UK, or over the previous 12 months, an approach suggested by the Advocate General in the Lock vs British Gas commission case. The Court decided that this was a matter for Parliament to determine rather than the Courts.

“Notwithstanding that, these rulings represent a major blow to some UK companies and could cast a huge shadow over the wider economy. If that wasn’t bad enough news for business, it is widely anticipated that employers will also have to include commission payments in holiday pay calculations after a similar case (Lock) is decided in February 2015.

“Affected businesses now face the very real prospect of having to fund enhanced payments to staff - even though they have operated within UK law for many years. We expect that many businesses will have to withdraw overtime arrangements, may force people to take holiday after times when overtime has not been worked, and restructure their pay arrangements.

"The uncertainty in terms of what might be around the corner is likely to see some companies holding back from making pay rises to staff which will have a knock-on impact on talent retention.”
Glenn Hayes - Partner & National Head of Employment Law

CBI director-general John Cridland said: "This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds - and not all will survive, which could mean significant job losses. These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions. This judgment must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face."

Business Secretary Vince Cable said: "Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”

Adam Marshall, executive director of Policy and Public Affairs at the British Chambers of Commerce said: "This ruling is damaging for businesses across the UK. Firms could be at risk of incurring significant financial losses, which could force them to close their doors altogether.”

John Allan, chairman of the Federation of Small Businesses, said: "Today's ruling leaves many questions unanswered. It has the potential to be very damaging to small businesses, presenting a real risk of small firms being forced to close down if faced by retrospective claims. Clearly it would be desperately unjust to expect businesses to pay retrospective compensation for how they calculated holiday pay when they where fully compliant with the law as it was understood at the time."