Overtime must be counted in working out holiday pay, EAT rules
Holiday pay must be calculated by taking into account overtime as well as basic bay, the employment appeal tribunal ruled today.
In a keenly-awaited decision in three test cases (Fulton v Bear Scotland, Law v Amec and Wood v Hertel), the EAT refused the employers' appeals against employment tribunal rulings upholding the employees' claims.
The decision centred on the interpretation of the Working Time Regulations 1998, implementing an EU directive which states that workers must have the right to paid annual leave. The directive does not specify how a worker’s pay should be calculated, and prior to today’s decision only basic pay has been counted when calculating holiday pay. However the EU Court of Justice ruled earlier this year that commission payments had to be taken into account, in order to avoid employees being deterred from taking holidays.
Today's decision however saw the EAT also rule that claims could only be backdated to a point three months before tribunal proceedings were begun, reducing fears that employers across the country would face claims potentially worth millions of pounds. It is estimated that around one sixth of the workforce, or 5m people, are regularly paid overtime.
The UK Government, along with business groups, had supported the appeal, due in particular to concerns about claims for back pay.
The employers may attempt to appeal further to the Court of Appeal.
Business Secretary Vince Cable responded to the ruling by setting up a task force to assess its impact.
"Government will review the judgment in detail as a matter of urgency," he said.
"To properly understand the financial exposure employers face, we have set up a task force of representatives from Government and business to discuss how we can limit the impact on business."
Donna Martin, employment solicitor at London firm Mackrell Turner Garrett, said the outcome would have "huge ramifications" for all companies whose workers carry out overtime above their contracted hours, and give rise to a significant number of claims.
"With either an appeal or referral [to the EU Court] likely, it may be some years before we have a final decision on whether overtime should form part of holiday pay", she added.
Trade unions welcomed the outcome. Paul Kenny, GMB general secretary, commented: "This judgment ensures that workers are properly paid for holidays and is a good and welcome result", while observing: "No doubt certain elements and interest will condemn the European directive upon which this court decision is based that will give workers in the UK the extra pay they have been denied by UK employers and politicians for years."
John Cridland, director general of the employers' organisation the CBI, however described the ruling as "a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses".
He added: "This judgment must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face."