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Holiday Pay Update – Employment Appeal Tribunal

Yesterday’s ruling (4th November 2014) in the Employment Appeal Tribunal relating to overtime holiday pay is being portrayed on news outlets as being a huge victory for employees and an equivalent disaster for employers, but is that really the case? 
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Yesterday’s ruling (4th November 2014) in the Employment Appeal Tribunal relating to overtime holiday pay is being portrayed on news outlets as being a huge victory for employees and an equivalent disaster for employers, but is that really the case?  To answer that question, we need to look in more detail at the arguments placed before the tribunal and what it may mean for both employers and employees.

Basically, the argument is reasonably straightforward.  Many employees have a basic working week for which they are paid the agreed hourly rate.  Some, however, then work “overtime”, that is, additional work hours per week.  These additional hours may be paid at the usual hourly rates, or sometimes, at an enhanced rate.  Since the introduction of the Working Time Regulations in 1998, employees have been entitled to 4 weeks paid annual leave.  The question before the employment tribunal was should the periods of holiday be paid as a basic working week or at the rate the worker would have had if the usual overtime commitment had been met on the time they were off on holiday?  The usual practice in the UK has always been to pay at the basic rate for holidays.  The employment tribunal however decided that this was the wrong approach.  It concluded that in the three test cases the workers were entitled to holiday pay at the rate they would have achieved in a normal working week, which included overtime.  The employers appealed and the matter was referred to the Employment Appeals Tribunal (EAT) which handed down its judgement today.  That judgement was in support of the original employment tribunal decision, upholding the position of the employees and dismissing the appeal of the employers.

So far so good for the employees.  The judgement did, however, deal with the important question of historical claims.  It is usually the case in the employment tribunal that claims can only be brought within three months of the employee suffering the detriment of which they complain.  In this case, that would be the underpayment of holiday pay.  The EAT reinforced this position in this case, meaning that employees may not be able to go back more than three months in bringing historical claims.  It very much depends on the time which has elapsed between when employees took holidays as to whether or not a three-month break has occurred to prevent them making backdated claims.  The circumstances of each individual would have to be looked at to determine how far back they would be able to claim. This may be the saving grace for many employers.

So are there any downsides for the employees?  Well the answer is probably yes. 

Sensible employers may well consider looking at their staffing levels and whether they should use part-time or agency workers rather than give overtime to their existing staff.  It may be that more employers will use the dreaded by some “zero hours contracts” to juggle staff hours with a view to minimising overtime, and therefore, the additional holiday payments.  If this approach is widely adopted, the sense of victory of many employees may be short lived.  In the short term they may gain a small amount of additional holiday pay, but in the medium to longer term may find that their overall annual income is significantly reduced.

Finally of course it should be remembered that it is likely the employers will appeal this decision to the Court of Appeal and beyond.  In that sense, resolution of this question may take some years.  It must, however, be borne in mind that one of the purposes behind the Working Time Directive was to provide workers with paid holidays.  A judgement which reduces their incentive to take those holidays is hardly likely to find much favour in the higher courts.  Any substantial reversal of this decision is, therefore, not the most probable outcome.

As with all legal matters, the devil is often in the detail.  So if you find you have a personal interest in this judgement, either as an employee or an employer, please feel free to contact us to discuss your individual circumstances.

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