Limits on backdated claims, but calculation of pay must change
An employee’s week in the Algarve could now cost their employer more in holiday pay if that staff member works non-guaranteed overtime. The change to how paid time off is calculated could affect five million employees, though the nightmare scenario of unlimited backdated claims appears to have been avoided. What has happened and what does HR need to know?
What has changed?
In November, an Employment Appeal Tribunal ruled that non-guaranteed overtime should be included when calculating holiday pay. Its judgment comes following decisions in three cases: Bear Scotland v Fulton; Baxter, Hertel (UK) Ltd v Wood and others; and Amec Group Ltd v Law and others. The ruling says that elements of remuneration, such as overtime and commission, must now be included when adding up holiday pay entitlement.
Although the ruling appears to have limited the scope for claims for backdated holiday pay, there is still uncertainty for employers on this point.
Who does it affect?
Employees who work overtime or who earn commission that tops up their base hours or pay. The ruling means that employees will now earn the same amount for their leave as they do in a normal week, regardless of their regular contracted hours. It is predicted to cause headaches for payroll departments in businesses that use zero hours contracts.
Amy Cusworth, employment law expert at Oxley & Coward, says: “It presents a problem for those businesses that use low hour contracts as a way to alleviate holiday pay, and it could present a financial burden for smaller businesses.”
What should HR do?
Business secretary Vince Cable has announced that the Department for Business, Innovation and Skills (BIS) will set up an employer task force to investigate the implications of the ruling. CIPD employee relations adviser Mike Emmott is supporting the task force’s work.
“Employers face considerable ongoing uncertainty because the judgment is likely to be the subject of an appeal, which is not good for business or jobs,” says Emmott. “However, the ruling does seem to have limited the scope for substantive retrospective claims, which was the biggest concern in terms of possible costs for employers.”
Experts are urging employers to consider taking action now. Diane Nicol, partner and head of employment law at Pinsent Masons, says: “HR directors have been aware of this problem for some time, but have not always been able to get the necessary traction with their boards that this is a material risk.”
She advises businesses to assess their payroll and HR records to examine potential exposure to claims and review their current policies to align with the judgment.
Ed Hussey, director of HR client services at Menzies accountants, says: “This is a difficult issue because there is uncertainty about the outcome of an appeal against this decision. But it could be years away and claims can be made in the meantime.”
Read an in-depth guide to choosing the right reference period for holiday pay calculations, from HR-inform, at bit.ly/PMholidaypay