Overtime Holiday Pay Q&A

The recent high profile overtime holiday pay judgment handed down by the Employment Appeal Tribunal (EAT) left many unanswered questions in relation to how much back pay a company should pay its staff and how it should be calculated in the future.

Although it is now very unlikely that there will be thousands of claims dating back 16 years as was once feared, the decision is still likely to lead to a flood of new claims and unaffordable back pay awards which could run to millions of pounds.

The following Q&A looks at the key issues for businesses and highlights what they need to be aware of.

Q. Will employers be able to claim backdated holiday pay for overtime they have worked?

Yes, however the judgment wasn’t as clear cut as many had hoped for. Employees will be able to make a claim as long as they have taken at least one day’s holiday in any given three month period, not had overtime taken in to account when receiving payment (which is regarded as a “deduction”) and bring a claim within three months of that deduction.

Q. Is all overtime included?

No, this judgment looks at “non-guaranteed” overtime which someone has to do or is offered it and can reasonably decline it, rather than voluntary overtime albeit this is likely to change in the future.

Q. How much will a business need to pay?

This isn’t certain, but it most likely that a business will need to pay the difference between what staff were paid and what they earned in overtime.

Q. Will a business face claims from previous employees?

This is unlikely due to the three month restriction that the EAT placed on backdating claims, albeit there is an argument that claims could be brought in the High Court for breach of contract if the claim is brought within 6 years – watch this space.

Q. What about future holiday pay?

It may well be that a business needs to work this out on the basis of how many hours overtime  employees did during the 12 weeks prior to the holiday. In the UK and according to the Employment Rights Act, this is how holiday pay is calculated. It may however be possible that an employer will have to take the previous 12 month period into account.  This was an approach suggested by the Advocate General in the Lock vs British Gas commission case. In this recent judgment, the EAT decided that this was a matter for Parliament to determine rather than the Courts.  Employers may if the 12 week period is adopted elect to force people to take holiday after a period where no overtime is worked to avoid having to pay an increased amount.

Q. Can a business face claims for breach of contract?

Again, the EAT didn’t answer this point, but it is likely that this point will be litigated as potentially employees have six years to pursue a civil claim.

Q. Can a business claim tax back on the back pay claims?

If a business settles with its employees they will get a tax deduction in their business accounts for the amount settled, and the costs associated with reaching that settlement. If the settlement relates to earlier years the deduction can be claimed for the year it relates to, and will normally attract (a small amount of) interest.

Q. What is the Government planning to do about this?

The Government has said that it is urgently looking into the judgment and on the day it was handed down, Business Secretary, Vince Cable, announced that he was launching a taskforce to assess its impact.

Expert Opinion

This is a significant case in relation to holiday pay, but in reality the decision provides guidance on only a small part of what will be a massive issue for businesses. Affected firms certainly now face the very real prospect of having to fund enhanced payments to staff - even though they have operated within the UK law as it has always been understood 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 or make redundancies if staff costs cannot be afforded.”

Glenn Hayes, Partner