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Overtime must be included in holiday pay – implications for business owners

Employers should be aware of a recent Employment Appeal Tribunal ruling which means that regular overtime must be included when calculating the holiday pay entitlement of employees. An HR expert examines the likely implications for business owners.

EAT Overtime Holiday Pay

What did the Tribunal ruling say?

The EAT has ruled that holiday pay must now include pay for non-guaranteed overtime worked by any employees. This is overtime that the employee is obligated to work when asked to do so, but which the business owner doesn’t promise to offer. Previously, this non-guaranteed overtime could be excluded from the calculations for holiday pay.

The Tribunal ruled on three cases – Bear Scotland vs. Fulton, Hertel vs. Wood and Amec vs. Law. In each case, employees successfully won the right to have overtime hours worked included in their holiday pay calculations. The EAT’s decision means that the employers in each case failed to overturn the employees’ claims.

What does it mean for business owners?

Kirsty Senior, Director of Citrus HR, said that while the ruling is a blow to employers, the impact is unlikely to be severe, and has provided some practical steps to take.

There are two important things to be aware of when considering this ruling.

Firstly, the ruling only applies to regular overtime, not rare occasions when staff members may be asked to help with seasonal peaks in the business, for example.

Secondly, despite predictions that claims could be backdated as far as 16 years, the EAT has made it clear that claims can only be backdated if less than 3 months have passed since the employee’s last holiday. This means that the longest period an employee could claim for backdated holiday pay from would be 12 months.

Steps to take for employers.

Senior says that there are three practical steps employers should consider in light of the EAT decision.

1) Pay all leave at the same rate (e.g. an average of relevant pay over the past 12 weeks).

2) Implement a 2-tier approach to calculating holiday pay entitlement, e.g. one method for up to 20 days, then a different method thereafter.

3) Paying an additional percentage of all non-guaranteed overtime undertaken by the employee that is reflective of their statutory annual leave entitlement. This would need to implemented carefully.

One way to avoid higher holiday pay costs would be to use casual or agency staff, but you would need to work out how much these savings would offset the additional costs of training temporary workers.

You could also change the terms of your employment contracts to state that staff are expected to work extra hours on occasion, for no extra pay, in return for time off in lieu.

Further Information

You should discuss any of these matters with an employment law / HR specialist before making any changes to your current employment practices.

It is worth noting that the EAT ruling could be referred to the Court of Appeal, which means a final decision may not be made for quite some time.

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