Holiday pay: a ticking time bomb?

Stephen Levinson

Stephen Levinson looks at how reforms could end up costing businesses millions.

This Friday judgment is expected in two trade union cases brought by Unite and GMB aimed at changing UK law on how to calculate holiday pay.

At present most employers use basic pay often ignoring overtime, commission and bonus payments.

As a generalisation UK law has permitted this but there have been a number of cases in the European Court of Justice making clear this is unacceptable and also some in the UK to the same effect.

The unions’ case is a direct attack on the UK law claiming it is incompatible with the European Working Time Directive. There is every chance the unions will succeed.

The reason for the difference in attitudes is based on the underlying principle of the Working Time Directive that holidays are essential to the safety and health of workers and nothing should be permitted that discourages them being taken.

It follows that if workers do not receive ‘normal remuneration’ they would be discouraged from taking holidays and as this would be bad for them this is therefore illegal. To many this is the nanny state gone overboard and it is certainly true that you do not read much in the way of evidence that this is a practical problem.

Unions of course take a different view and simply say that employers should comply with the law, which is a perfectly reasonable line for them to take. The legitimacy of these points of view is unlikely to concern potentially thousands if not millions of workers once they realise they have significant cash claims, which in some cases may be backdated to 1998.

If the unions win the court has the choice of either declaring that our existing law is incompatible with European law or ‘reinterpreting’ our laws to state it complies (and in theory always has complied) with EU law.

That will be a very significant factor for firms in the private sector as, if new law is required, they will be sheltered from claims until the UK changes its law and, otherwise, they will be liable for back dated claims.

Whatever the outcome this week there are likely to be appeals, but assuming the worst for employers there are a number of issues for them to consider and they should be doing this now.

The first is obviously to review existing terms and see how holiday pay is calculated. If overtime, commission, attendance allowances and regular bonus payments are ignored then plans need to be made.

The basic principle is that whatever can be regarded as an individual’s ‘normal remuneration’ has to be included. If the payments are an integral component of the performance of the work it is likely they have to be part of holiday pay. This may require a detailed review of the terms on which such payments are made before advice can be given.

Once a view is taken about how much difference this makes to the weekly sum then an analysis of the turnover of staff may be relevant as if it is high that may reduce the prospective bill and vice versa.

If the assessment of risk is sufficiently adverse then consideration should be given to changing the contractual rules as doing so may have the effect of reducing the historic liability after the usual three-month time limit for claims has elapsed. That decision will have to be factored against the risk that such a move may itself trigger claims.

Also in serious cases it will be necessary to make provision in accounts for these claims. Whether it is possible to make the calculation required will depend on the quality of the records maintained by the employer. One retailer has already done this for many millions although it is reported there are special circumstances in that case.

Is this all lawyers’ alarmism? A lot of the heat may disappear if there is a declaration of incompatibility but otherwise it is probable that the risk of large claims is very real. Law firms and unions are already promoting themselves on the basis of the risk advertising their services to workers and employers alike.

Even more convincing is the fact that it is clear from statistics from Acas that their early conciliation service is already receiving many ‘group claims’ seeking these payments. Group claims are made on behalf of numbers of claimants and this probably means that unions are collecting opportunities to litigate.

As for the cost to British business, it is quite possibly huge. According to Katja Hall, deputy director-general at the Confederation of British Industry “backdated claims on holiday pay could lead to bills of millions of pounds for each business, and ultimately threaten their very existence”.

And we always thought holidays were fun.

Stephen Levinson is a consultant solicitor at Keystone Law.