NEW HOLIDAY PAY RULING

The UK Employment Appeal Tribunal has recently ruled under the Working Time Regulations that non-guaranteed overtime should be factored in when calculating the amount of holiday pay that an employee is entitled to.

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The Ruling

Holiday pay now needs to include pay for non-guaranteed overtime which was worked by the employee in the 12-week period before the holiday. Non-guaranteed overtime is that in which the employee is contractually required to work, but the employer does not promise to offer.

Guaranteed overtime is where the employer is obliged by the contract to offer and pay for agreed overtime. Following a judgment in 2004, guaranteed overtime must be included within the calculation of holiday pay.

Previously, employers have been paying holiday pay based on an employee’s basic pay but now employers will have to take into account certain types of overtime when calculating holiday pay, rather than just considering basic pay.

What does the Ruling apply to?

It 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, excluding overtime.

What this means for business owners is that, as well as potentially having to pay out more holiday pay going forward, they may have to pay out for previous underpayments as employees will now be able to claim backdated holiday pay.

The Government is taking action to protect UK businesses from the potentially damaging impact of large backdated claims. Changes made to regulations under the Employment Rights act 1996 will mean that claims to Employment Tribunals on this issue cannot stretch back further than 2 years.

Workers can still make claims under the existing arrangements for the next few months which will act as a transition period before the new rules comes into force. The changes apply to claims made on or after 1 July 2015.

So does the Ruling apply to voluntary overtime?

No. Although there will no doubt be further debate and case-law over whether overtime is voluntary or not – it is likely that future case law will determine that regular voluntary overtime will be deemed as “normal pay”.

Is there anything being done to tackle the Ruling?

In an attempt to limit the impact of this holiday pay ruling, the Government is looking into it as “a matter of urgency”. 

Employers and employees can visit Acas - www.acas.org.uk/holidaypay - for the latest free Acas advice on holiday pay.