Overtime to be included in holiday pay

November 4, 2014 By SGW Payroll | Payroll

Employers should factor non-guaranteed overtime into holiday pay calculations, the Employment Appeal Tribunal (EAT) has found. However, the judgement has limited the potential for back-dated claims.

The EAT’s decision to include overtime within annual leave wage calculations will lead to higher costs for many employers.

“However, any claims in respect of underpaid holiday pay in the past are only possible to the extent that no more than three months elapsed between any such underpayments”, commented Kate Hodgkiss, Employment Partner at DLA Piper. “In practice this is likely to mean that employees can only claim in respect of one leave year rather than, as had been a possibility, in respect of all underpaid leave as far back as 1998.”

Due to the distinction between four weeks’ leave provided by the Working Time Regulations, Hodgkiss warned that the two elements will be payable at different rates.

“This will cause administrative headaches for employers and in the long run the Government may seek to remove the distinction between the two; however, this is unlikely to be a legislative priority before the election,” she explained “Employers will need to decide in the short term whether to pay holiday at different rates or to pay all leave at the same rate.”

John Cridland, Director-General at the Confederation of British Industry, believes that the decision is a “real blow” to UK companies, which now face punitive costs that could lead to job losses.

“These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions,” he said. “This judgement must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”

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