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A recent tribunal decision could increase the amount of holiday pay employers have to reimburse their staff.
In the case of Neal v Freightliner Ltd the tribunal held that EU law requires the amount of a worker’s holiday pay to be based on their normal remuneration, which includes not only basic salary but any element of pay linked to the performance of the worker’s contractual obligations, including overtime.
Heather Grant, employment lawyer at Maxwell Hodge, said: “The recent tribunal decision has thrown open a new pitfall for employers: the calculation of holiday pay in relation to overtime. If an employee regularly does overtime it now appears that this should be factored in to the calculation of their holiday pay.”
UK law currently states that hours which aren’t guaranteed by the contract, such as voluntary overtime, don’t need to be considered when calculating holiday pay. As a result most holiday pay is based on the basic salary of an employee. However, the tribunal’s decision means that voluntary overtime now has to be considered.
A further complication though is that this ruling only applies to the four weeks of annual leave guaranteed under EU law. For the additional 1.6 weeks provided by UK law or any additional contractual holidays awarded, holiday pay can be calculated using basic salary, meaning employers face some complicated sums.
“This ruling could have a major impact on some industries where workers undertake lots of overtime” Grant adds. “There is a concern that employees can also back date their claims to as far back as 1998, so we are looking at a big financial bill here. The case is being appealed but the decision is in line with recent decisions on the subject from the European Court of Justice, so the prospects of it being overturned are not good.”
“Whilst the CBI is lobbying the government to minimise the fallout from recent decisions on the calculation of holiday pay, our advice is that businesses should prepare for the worst and consider taking steps to minimise the financial cost of this decision.”
This may include reducing the amount of overtime on offer or the level of overtime pay.
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