11 Oct 2013

Tribunal Decision Could Increase Holiday Pay Costs for Employers

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A recent tribunal decision may have a major impact upon the costs of holiday pay for many employers.

It important to emphasise the word ‘may’ because the decision is being appealed and, in light of the potential outcome of the decision, may go all the way to the Supreme Court. We are recommending, therefore, that it would be advisable to wait for the outcome of the litigation before taking appropriate action because the decision may be amended or restricted. It is important, however, that you are aware of the possible implications of the current decision. 

In the case Neal v Freightliner, it was ruled that EU law requires that a worker’s holiday pay should include not only salary, but also any element of remuneration ‘intrinsically linked’ to the tasks required under the worker’s contract.  The tribunal held that this included both compulsory and voluntary overtime, as well as basic pay.  At the moment most organisations calculate holiday pay on the basis of basic salary only.

What are the implications? If you pay basic salaries only, none at all. If, however, your pay and salary structures include such elements as overtime, shift premiums or annual hours arrangements, you could find that there will be a significant increase in the cost of holiday pay.

How would you calculate holiday pay on the basis of this decision? In effect, you will need to establish employees’ average weekly earnings in the 12 weeks leading up to their holiday. So, holiday pay could vary considerably and could be open to abuse.

Fortunately, liability is not open-ended because a claim has to be made to an Employment Tribunal within three months of the last underpayment. The major concern is the fact that a claim can be backdated to 1998 which is when the relevant legislation (Working Time Regulations) was introduced or to the start of their employment if the employee started after 1998.

A further complication is the fact that there it has highlighted a clash between EU law and UK law. The Working Time Regulations are an EU initiative and so the average earnings calculation should only be applied to the four weeks’ holiday guaranteed under EU law. Under UK law, there is an additional 1.6 weeks’ compulsory legal holiday entitlement but this only needs to be paid at the pay rate specified in the contract of employment!

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