The news channels and social media sites are saturated with the Employment Appeal Tribunal’s (EAT) decision that overtime should be taken into account when holiday pay is calculated. But once we get past the headlines, what does this ruling mean for businesses in practice?

The following points are crucial for companies to consider:

  • The ruling relates to “non-guaranteed overtime” as opposed to voluntary overtime. “Non- guaranteed overtime” means overtime which the employer is not obliged to offer but that the employee is contractually obliged to do if offered.
  • The requirement to include overtime only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks’ holiday (as required by UK law) or any additional contractual holiday can be based on normal remuneration excluding overtime.
  • If there is a gap of three months or more between claims of qualifying holiday pay then this breaks the chain for any claim. In practice, as the requirement to pay holiday pay only applies for the first four weeks’ holiday then during the last three months of any holiday year employees are likely to be taking the additional 1.6 weeks’ holiday or any additional contractual holidays. This would then break the chain for any claims. The maximum risk to most businesses is likely to be backdated claims for the current holiday year only.

So what should businesses do? Firstly, managing directors and HR departments should be ready to answer employees’ questions. Some, for example, may now think they are entitled to 16 years’ backpay!

Secondly, firms must decide how administratively they are going to include overtime pay in the holiday pay calculations.

Businesses should also decide whether they are going to include overtime in the first four weeks of holiday pay only, in the 5.6 weeks’ holiday pay or the full contractual holiday pay entitlement (if greater). This is likely to be based on a consideration of the administrative costs of having a two-tier holiday pay balanced against the costs of paying holiday pay that includes overtime for more than the required four weeks.

It will be important for firms to consider whether they need to budget in the current financial year for any valid claims their employees may have for backdated pay. Rather than settling any claims now, it may be worth waiting to see whether the employees bring claims or at least invoke the Advisory, Conciliation and Arbitration Services (ACAS) conciliation process.

Finally, to minimise the financial impact of this case, businesses should review contracts and processes. For example they should:

  1. Change contracts to provide for voluntary rather than “non-guaranteed overtime”
  2. Limit or refuse holidays after periods of high overtime
  3. Use agency or bank staff to cover periods traditionally covered by overtime

It is likely this case will be appealed by either the employer or the employee (on the issue of backdating) so it’s important to keep an eye out for future updates.

Article by Karen Bexley, who a is director of employment law – corporate and commercial at MLP Law, the North West-based commercial and private client law firm.