Holiday pay ruling makes waves for small businesses

The decision made yesterday by the EAT on three tests cases may be considered a victory for employees in the UK however is a massive blow for the SME community.

The ruling in simple terms was providing clarification on what is considered to be ‘normal earnings’ for calculating holiday pay as currently only basic pay is taken into account. The ruling means that overtime and potentially bonus and commission payments will now form part of the calculations for ‘normal salaries’ which is estimated to cost businesses millions and potentially put some businesses in a position where they can no longer trade.

Nick Wilson, our Employment Law partner at Crooks Commercial Solicitors commented:

"The issue of whether overtime pay should be included when calculating holiday pay has been a contentious one for some time. Yesterday's ruling presents some clarity but it is unwelcome news for employers. Non-contractual or non-guaranteed overtime should be included in the calculation of holiday pay. Businesses should give consideration to whether overtime is necessary at all in order to avoid the significant financial burden that now arises. If overtime cannot be ruled out, employers will need to factor in the potential increase in holiday pay. The EAT's decision was not all bad news - any Tribunal claim relating to a failure to pay full holiday pay must be made within 3 months of that failure. If your employees begin raising this as an issue, it is worth considering whether any claims go as far back in time as the employee may think"

What about backdated payments?

The EAT ruled that if there was a gap of three months between holidays, then claims for underpaid time-off preceding this gap would be inadmissible. In reality this means that claims are only likely to be for leave within the last year which is substantially less than initially feared.

The tribunal also ruled out including the further 8 days of annual leave that employees are entitled to under UK Law which is over and above the EU levels of 20 days per annum. This typically relates to the 8 bank / public holidays which are included in any entitlement.

What does this mean for my business?

The Government has set up a task force to assess the ruling and has not yet decided whether to appeal against the tribunals ruling although initial comments suggest this is likely.

There has not yet been any firm decision about commission and bonus payments being included in this calculations although there is a test case due to be heard by the UK courts before the end of the year.

What do I do next?

We are working with our legal Partners at Crooks Commercial Solicitors to consider the impact of this ruling and we will be working with all our clients to ensure they are aware of the potential impact on their own business and we will work to issue clear guidance on how to handle holiday pay.

If you need any further advice on this matter then feel free to contact me for a chat on 0844 8797286

Author – Sarah Birkenshaw

Date – 11/2014