What does the EAT ruling on overtime and holiday pay mean to employers?

Employment Appeal Tribunal (EAT) rules that overtime should be taken into account when calculating holiday pay – what does it mean for businesses in practice?

The EAT ruled that people obliged to work overtime should have overtime pay and other bonuses and allowances included in their holiday pay.  This ruling could lead to pay-outs worth thousands of pounds and paves the way for similar cases.

What this means in practice:

  • The ruling relates to “non-guaranteed overtime” as opposed to voluntary overtime. “Non-guaranteed overtime” is overtime which an employer is not obliged to offer but that the employee is contractually obliged to do, if offered.  So, first off, check the wording of your employment contracts to see if this applies to your employees.
  • The requirement to include overtime only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks’ holiday (as required by UK law) or any additional contractual holiday can be based on normal remuneration.
  • If there is a gap of three months or more between claims of qualifying holiday pay then this breaks the chain for any claim. The requirement to pay holiday pay only applies for the first four weeks’ holiday.  The additional 1.6 weeks’ holiday or any additional contractual holidays during a considerable part of any holiday year (and for most, at least a 3-month period) should break the chain for any claims. The maximum risk to most businesses is likely to be backdated claims for the current holiday year only and, of course, payment for future holidays following the ruling.

So what does this mean to you as an employer?

  • Be prepared to answer queries from employees, based on the above guidance. Particularly, be able to explain why they won’t be entitled to claim for multiple years’ back pay!
  • Decide how you are going to administer this in holiday pay calculations in practice (if, indeed, the ruling is applicable to you). For example, decide whether you are going to include overtime
    • in the first four weeks of holiday pay only,
    • in the full 5.6 weeks’ holiday pay or
    • in the full contractual holiday pay entitlement (if greater).

This is likely to be based on a consideration of the administrative costs of having two-tier holiday payments balanced against the costs of paying holiday pay that includes overtime for more than the required four weeks.

  • Consider whether you need to put aside budget in this financial year for any employees’ claims that may be valid for backdated pay. You could do this reactively, i.e. wait to see whether employees intend to bring claims, rather than deal with it immediately.
  • To limit the impact of this ruling from a financial perspective, review your contracts and processes. For example if you have an overtime clause, change it to provide for “voluntary” rather than “non-guaranteed overtime”. This will mean workers are not contractually obliged to work the overtime you offer, but at least if they do work it you won’t have to allow for it in holiday pay.

You could also consider limiting or refusing holidays after periods of high overtime or using agency or bank staff to cover periods traditionally covered by overtime.

If in doubt, contact us to see how we can help!