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Hot topic: Backdated holiday pay

After months of speculation, the Employment Appeal Tribunal (EAT) recently upheld a previous ruling that overtime should be included when calculating employees’ holiday pay. While the impact is still unclear, some have speculated this ruling could end up costing UK businesses billions.

In part one of this Hot Topic, Sinead Lawrence from the CBI gives her view:

"The Employment Appeal Tribunal (EAT) ruling that some overtime payments should be included in the calculation of holiday pay leaves businesses facing significant new costs.

While we wait for further clarification as to the extent of the ruling, and for the interpretation of how the related European Court of Justice ruling on commission payments should be applied in the UK,  the direction of travel seems clear: the cost of holiday pay will rise.

CBI members estimate that the new method of calculating holiday pay will add 2% to 4% in pay costs, not to mention the increase in pension and tax contributions as well as a new administrative burden.

At a time when businesses and employees face challenges of low productivity and low pay growth, this significant new cost is unwelcome. It will have a negative impact on growth, investment and employee relations, and may see businesses look to replace popular elements of the reward package.

The major threat to business is the risk of backdated liabilities, which could leave individual firms facing bills of millions of pounds, despite having been fully compliant with UK law.

The recent EAT ruling on overtime helpfully looked to mitigate much of this cost by concluding that claims for back pay would be limited by any gaps of more than three months between periods of holiday. However, this interpretation remains open to challenge and still leaves employers facing backdated bills.

The redefinition of holiday pay goes far beyond what could have been foreseen when the working time rules were introduced, and does not respect the EU treaty that leaves matters of pay to member states.

That’s why we’ve been calling on the government to defend existing UK law on holiday pay and protect businesses from retrospective claims."

Sinead Lawrence is a senior policy adviser for education and employment policy at the CBI