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What the Holiday Pay Case Means for Businesses

Following the ECJ decision in Lock v British Gas earlier this year, employers were faced with the prospects of adding commission earnings to holiday pay. This week HR websites and newspapers alike have been awash with stories about the EAT’s ruling in Bear Scotland v Fulton, which has ruled that holiday pay calculations must include extra payments such as commission and overtime. In the light of Lock it wasn’t that much of a surprise, but it will have a considerable financial impact on businesses which regularly pay for overtime.

The basis for the argument that holiday pay should include payments made for overtime is that it should be based on normal salary. So what does this mean? Well firstly it only applies to the EU four weeks’ holiday, not the extra 1.6 weeks provided by UK law – so if you pay 20 days plus bank holidays, the bank holidays are still at the standard rate. Secondly although a lot has been said about backdated claims, the EAT ruled that workers can only make a back claim if it is less than three months since their last holiday; this may be appealed.

However, employees can claim back pay only if it is less than three months since their last holiday. Companies had feared that they could face claims dating back to 1998 when the Working Times Regulations were introduced.

The Government may challenge the EAT’s decision. The Business Secretary, Vince Cable, , said: “The government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”

All the main UK business groups are challenging the decision. Director-General of the CBI John Cridland, said: “This is 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. These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions. 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.”

Many companies will be able to afford this change – some already pay holiday pay in this way – just as plenty of companies already pay over and above the minimum wage and the ‘living wage’. But there are companies that simply cannot afford sudden increases in the amount they must pay. The 65% of UK companies which fall into the SME bracket form the bedrock of the economy and often have the hardest financial challenges, but here is yet another problem for them to cope with.

The Bear Scotland ruling applies to paid overtime and will affect future holiday payments. Work out the true cost of this change for now and for the future. There are steps you can take to reduce the impact.

  • You may wish to limit paid overtime and at the very least making sure that workers do all of their contractual hours before they are paid for overtime.
  • Phase out enhanced overtime rates.
  • Make sure that workers don’t abuse overtime by doing excessive amounts in the weeks before a holiday, as this will artificially inflate their pay.
  • Limit the taking of holiday in peak periods.
  • Some of our clients have moved to an annualised hours system to reduce the impact of high levels of overtime at peak time. It will also have the advantage of keeping holiday pay the same. Employees can work shorter hours during periods of lower demand, longer hours when it’s busier, but get 12 equal payments a year.
  • Last but not least, workers who work paid overtime have just become more expensive. Are they performing their tasks diligently and competently? Do they meet all of your workplace standards most of the time? If the answer to that is “no” take action. Manage them through the performance process. Hopefully they will improve and work to the required level. That’s the desired outcome, but if not, they will be managed out of the business. The Bear Scotland case provides yet another reason for not tolerating workplace passengers who do not contribute to your business.

Russell HR Consulting provides expert knowledge in HR solutions, employment law training and HR tools and resources to businesses across the UK.

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