· 1 min read · Features

Hot topic: Backdated holiday pay, part two

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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 two of this Hot Topic, Nina Robinson from the HR Legal Service provides a legal perspective.

The result of the EAT judgement is that most employers who pay overtime are at risk of claims. Employers are now required to include most types of overtime when calculating holiday pay for workers with normal working hours. The position on voluntary overtime remains unclear.

The judgment only applies to the four weeks’ paid annual leave under the Working Time Directive and not the additional 1.6 weeks under Working Time Regulations. Further, claims for unlawful deductions based on historic underpayments will be limited as claims can only go back as far as the start of a series of deductions where the gap between deductions is three months or less.

An appeal is expected, which means the position is far from settled. We expect to see considerable further litigation relating to variable pay elements such as commission, incentive bonuses and the appropriate reference period for calculations.

Employers must decide whether to change the way they calculate holiday pay now or await the outcome of appeals and domestic rulings. Making changes now will increase operating costs but ensures compliance, good employee relations and prevents or limits historic claims.

However, while the law is unclear and unsettled employers are at significant risk of overpaying or paying where it may be unnecessary.

For now, the best advice is to conduct a risk analysis to identify any variable pay elements and the additional costs if they were included in holiday pay calculations. If you decide not to change your method of calculating holiday pay, consider putting aside a budget to meet the costs of any later claims or settlements.

Nina Robinson is head of legal services at the HR Legal Service

For part one of this hot topic, click here