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Holiday pay ruling could affect wages and retention

An imminent decision on whether overtime can be taken into account when calculating holiday pay could lead to pay freezes and affect staff retention, according to law firm Irwin Mitchell employment partner Chris Tutton.

Later today, the employment appeal tribunal will rule on two cases, Wood vs Hertel UK and Fulton vs Bear Scotland, in which employees claim their regular overtime should be taken into account when working out holiday pay.

The original tribunal ruled in their favour, and if the appeal tribunal upholds that decision companies could face backdated claims running into billions of pounds.

Whatever the decision, there is likely to be more than one appeal before a final ruling comes into effect, meaning businesses may not know the exact cost for several years.

Tutton believes a ruling by the appeal tribunal in favour of the employees would not only be a "huge blow" to many companies, but will also "cast a shadow" over the wider economy.

"Affected businesses could face the very real prospect of having to make huge backdated payments to staff, even though they have operated within UK law for many years," he said.

"We expect that many businesses may have to withdraw overtime arrangements 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.

Fellow Irwin Mitchell partner Glenn Hayes told HR magazine he expects the appeal tribunal to rule in favour of the employees, but believes the details of the ruling are less certain.

"Whether they rule that the term of overtime employers will have to take into consideration is 12 weeks or 12 months will make a big difference," he said. "Employers will be hoping for 12 weeks, as this will lead to them not having to look back as far retrospectively and also lower levels of complexity."