Overtime decision fuels employer worries over holiday pay

Employers could be forced to pay out billions in backdated holiday pay claims following Employment Tribunal ruling.

An Employment Tribunal has held that overtime pay must be included when calculating holiday pay under the EU Working Time Directive.

In Neal v Freightliner Ltd, the tribunal has held that both compulsory and voluntary overtime pay should be included when calculating holiday pay under the regulations. It follows on the heels of a 2011 ruling in Williams v British Airways where the European Court held that holiday pay should be calculated based on basic pay plus any other payments that were “intrinsically linked” to work, such as overtime.

Now there are worries that the principle could be applied on other variable pay elements such as commission or even bonuses, and the ruling could result in big back pay bills for the retail and hospitality industry and other sectors where overtime is a regular part of the package.

In the meantime, experts are suggesting that employers think about cutting the amount of overtime worked or by changing pay rates for overtime, so as to minimise any future pay-out they may have to make.

And if employers take action now to change the basis for holiday payments, they have the chance to stop the clock for backdated claims, as any claim must be made within three months of the last incorrect payment. If employees are told that this change is on a temporary basis, then if the ruling in the Neal case is overturned on appeal, employers can go back to the old calculation method.

Said employment law expert Mark Cornish of Grant Saw Solicitors: “A particular concern is that employees can bring claims backdated to 1998, provided they are brought within three months of the most recent underpayment. Because of rulings like this, John Lewis recently took the decision to pay staff back payments amounting to £40 million having decided that they had been miscalculated for the past seven years. ”

He added: “There is some hope the Neal decision may be overturned on appeal, so employers can wait for that appeal judgement before coming to a decision on introducing any changes, but they need to be alert to the potential impact of this case.”

This is not legal advice; it is intended to provide information of general interest about current legal issues.