Holiday pay and overtime: what does the law say and how can employers deal with it?
You may have seen news stories in the last few months about holiday pay, as there have been some very significant recent cases on what should be included in holiday pay.
In brief, the courts have ruled that holiday pay for employees who work overtime should generally factor in the overtime that they work. This only applies to people who work “guaranteed” and “non-guaranteed overtime” i.e. overtime that is not always available but, when it is available, it is compulsory for them to work it (as opposed to voluntary overtime, which employees are entitled to refuse). This means that as an employer, if you have employees who work overtime you should be aware that their holiday pay may need to be increased to take account of this.
One point to note is that the increased holiday pay rate currently applies only to the first 20 days’ holiday that each employee takes per year (the minimum amount of holiday required by European law, which doesn’t include the 8 bank holidays in England and Wales required under English law). The other 8 days, as well as any additional contractual holiday days which your employees may get over and above the statutory minimum, can continue to be paid at the basic salary rate.
As an employer there is no way that you can stop the ruling applying to you. However, there are a few ways that you can deal with it to minimise your financial exposure.
1. Accept the ruling and increase holiday pay to include overtime
The requirement to include overtime in holiday pay now applies to all businesses with employees who work guaranteed and non-guaranteed overtime. The amount of overtime pay to be added on to holiday pay should be calculated by averaging out the amount of overtime payment earned by the individual employee over a reasonable period of time before the dates of the employee’s holiday. The government is likely at some point to legislate on how long this calculation period should be, but at the moment the only requirement is that it is a “reasonable” period. You could, for example, average out the overtime earned during the 12 weeks preceding the employee’s holiday (which is commonly used as the calculation period in other areas of salary legislation), however there is a possibility that an employee could work a lot of overtime in those 12 weeks, to maximise their holiday pay.
Instead, you could consider averaging the overtime worked in the 52 weeks preceding the employee’s holiday, so that the weeks where the employee has worked no overtime at all, and therefore earned no overtime pay, will also be included. In businesses with peaks and troughs, where overtime is crucial, this is likely to represent a fairer calculation overall.
Until the government legislates on the calculation period, there is a strong argument that a 52 week period is reasonable.
2. Remove guaranteed and non-guaranteed overtime from your employees’ contracts
You could consider changing the overtime provisions in your employees’ contracts so that they are no longer entitled to guaranteed and/or non-guaranteed overtime and instead make any overtime voluntary. Voluntary overtime does not need to be included in holiday pay, however, the fact that it is voluntary means that the employees would be able to refuse to work overtime and you may run into problems with staffing levels and may have to consider alternatives e.g. by using an agency worker. Whilst you may save money on holiday pay, the cost of agency staff could be disproportionate.
In addition, an alteration of this nature to existing employees’ contracts would amount to a change to their terms and conditions of employment, so it is not a change that you can impose unilaterally – you would need to consult with the employees on the reason for the change and obtain their consent to the change.
3. Stop offering overtime to your existing employees and take on an additional employees to cover the extra hours
You could stop offering overtime to your current employees and recruit an additional employee, perhaps on a casual or zero hours basis, to cover the work that is currently done as overtime. You may not need to change the existing employees’ contracts, providing you have not created an expectation to overtime, and their holiday pay would stay at basic salary only as they would no longer be working overtime. Holiday pay for the additional casual employee would also be at their basic rate (for any casual or zero hours worker. However, casual and zero hours contracts come with their own complications so we would suggest that you seek advice on the terms of any such contract before taking someone on.
4. Continue paying basic salary on the understanding that this may result in a claim
A final option available to you is to ignore the ruling and continue paying holiday pay at basic rate. However, you must be aware that there would be a risk of your employees bringing a claim against you for the additional holiday pay that they should be paid, together with a claim for backdated holiday pay that should have been paid for their previous holidays (see below).
Backdated claims
An associated issue which you should also be aware of is the matter of claims for backdated holiday pay. Although this judgement came out towards the end of 2014, it has retrospective effect. At present it is possible for employees to bring claims against their employers for the extra holiday pay that they should have been paid for previous holidays, had overtime been included in their holiday pay. Employees are currently able to bring backdated claims whether or not you are now paying them a higher rate of holiday pay.
The claim arises from what is known as a “series of deductions”, i.e. that money owed to the employee has been systematically deducted from their pay over a period of time. The employee has a time limit of 3 months from the date of the last deduction in a series to bring a claim, in other words, 3 months from the last time they received holiday pay at basic rate as opposed to basic rate + average overtime.
Probably the most straightforward way to minimise the risk of employees bringing a claim for backdated pay is to pay them the higher rate of pay next time they take any holiday. This will have the effect of bringing to an end the “series of deductions”, and start the clock ticking for the 3 month period to claim. If they haven’t brought a claim within 3 months of this last payment, any claim after this date would be too late.
At present it is possible for backdated claims to be made for underpaid holiday pay dating back to 1998 (when the Working Time Regulations were introduced) where the employee in question has been employed by you since that date. Other employees are currently able to claim back to the date their employment with you commenced. The Government has however acted quickly and introduced new legislation which will limit backdated claims to a maximum of 2 years’ underpaid holiday pay. The new rules will apply to claims made on or after 1st July 2015.
For more information on holiday pay and overtime, and how you may be able to minimise your financial exposure as a result of this ruling, please contact the Employment team at Askews Legal LLP on 024 7623 1000 to speak to Lianne Payne.
Please note that the courts have also ruled that holiday pay should include an element to reflect bonuses and commission earned by employees. This article focuses on overtime; however if you have any queries relating to holiday pay and commission or bonuses please get in touch with us using the contact details above.
Askews Legal LLP – Solicitors in Coventry.
