What employers need to know about the new EAT rules on holiday pay and overtime

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What employers need to know about the new EAT rules on holiday pay and overtime

05 Nov 2014

The much-anticipated judgment of Hertel, Amec v Wood and Others, regarding holiday pay, was delivered by the Employment Appeal Tribunal (EAT) yesterday. Here, Kuits’ Employment team explains the new rules and how they will impact employers going forward.

Holiday pay, under the Working Time Regulations (WTR), is based on an employee’s “normal pay”; in practice, this has been interpreted such that companies have paid employees only basic salary during annual leave. However, recent cases have cast doubt on this approach and it has been decided by the EAT that payments for what it termed “non-guaranteed overtime” (that is, overtime which, although not contractually obliged to, the employer offers due to its business needs and the employee is obliged to accept) and certain other allowances intrinsically linked to performance of the employee’s duties should be included in holiday pay.

This goes against the long-held precedent that holiday pay does not have to include payment for overtime that is not guaranteed (i.e. that the employer is not contractually required to provide to the employee).

Furthermore, in this case, the EAT held that taxable remuneration (that in excess of the amount needed to cover expenses) relating to travelling time and fares of employees should be deemed to be part of “normal pay” and, accordingly, included in holiday pay.

Under UK Law (the WTR), employees are entitled to 5.6 weeks of annual leave whereas, under European Law, the minimum leave entitlement is four weeks. For the purposes of this decision, which is based on European Law, holiday pay only needs to include the enhanced salary for four weeks of their entitlement. This means that for employees entitled to the statutory minimum leave entitlement, they can still be paid their basic salary only for 1.6 weeks of an employee’s annual leave.

Kevin McKenna, Head of Employment at Kuits, commented: “Understandably, employers will now fear an onslaught of claims for backdated holiday pay and will want to know how far back employees’ claims can go. Employees have a limitation period of three months in which to bring a claim regarding these provisions. This means they have three months from the last time they received an incorrect payment in order to bring a claim (unless the tribunal deems it was not reasonably practicable to bring a claim within this time).

“If there has been a gap of three months during which no underpayments were made, the chain would have been broken.

“Unions and other representatives are already taking steps to mount collective claims on behalf of employees. The government has created a taskforce to assess the impact of this decision as concern mounts that this could force businesses out of the market.

“However, this is very unlikely to be the final word as leave to appeal this decision to the Court of Appeal has already been given by the EAT. Therefore, it is likely that any claims made by employees will be stayed pending this decision.”

If you need practical advice regarding yesterday’s judgment please contact Kuits’ Employment Team on 0161 838 7806.

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