Warning for Employers regarding Holiday Pay Calculations


Employers may have to pay for backdated holiday pay claims following a recent Employment Tribunal ruling

An Employment Tribunal has determined that all overtime pay must be included when calculating holiday pay under the EU Working Time Directive.

In the case of Neal v Freightliner Ltd, the tribunal held that both compulsory and voluntary overtime pay should be included when calculating holiday pay under the regulations. This follows the 2011 ruling in Williams v British Airways where the European Court held that holiday pay should be calculated based on basic pay plus any other payments that were “intrinsically linked” to work, such as overtime.

Potentially, this principle could be applied to other variable pay elements such as commission or even bonuses, and therefore the ruling could result in big back pay claims for the retail and hospitality industry or other sectors where overtime is a regular part of the package.
As a consequence, employers should consider cutting the amount of overtime worked or changing pay rates for overtime in order to minimise any future pay-out they may have to make.

If employers take action now to change the basis for holiday payments, they may be able to stop the clock for backdated claims, as any claim through the employment tribunal system must be made within three months of the last incorrect payment.

Of particular concern for employers is that employees could bring claims backdated to 1998, provided they are brought within three months of the most recent underpayment.   However there is hope the Neal decision may be overturned on appeal, so employers could wait for that appeal judgement before coming to a decision on introducing any changes, but they need to be alert to the potential impact of this case.

Julie Taylor employment associate at Gardner Leader recommends employers review their current practices and seek legal advice where necessary.

For further information please contact Julie Taylor on 01635 508080.

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