The Employment Appeal Tribunal’s (EAT) recent ruling that overtime should be included in holiday pay has resulted in a flurry of media headlines about the possible impact the ruling could have on British businesses. The Financial Times quoted John Cridland, head of the CBI as saying employers would feel ‘anguish’ about the decision, and EEF research predicted that the ruling would mean higher costs for businesses, with two-thirds of manufacturers’ estimating that it could add an additional three per cent to payroll.
Sky News reported government concerns that the decision could ‘cripple’ British businesses but asked if such fears were exaggerated and The Guardian reported that the Unite union said the ruling ‘puts right a wrong’ to millions of British workers.
But what’s the likely impact behind these headlines?
According to HR Review, the ruling relates only to ‘non-guaranteed overtime’ rather than voluntary, whereby an employer is not ‘obliged to offer’, although the employee is ‘contractually obliged’ to work overtime if offered. Furthermore, overtime requirements relate to the first four weeks of annual leave, with overtime requirements being excluded from any remaining holiday entitlements after that period.
Claims for backdated overtime payments can only be made until there is a three-month gap between qualifying holiday pay, which then ‘breaks the chain’ for any claim.
Matt Duffy, Head of Online Consultancy at Aon Employee Benefits said that although the ruling would mean an increase in cost for employers, it would also mean that employees who rely on overtime to supplement income would no longer be worse off during holiday periods.
“This is another step which will help improve employee wellbeing as this supports employees to take their annual leave entitlements,” he said. “In the past, they may have been reticent to do so, as holiday pay would be less than the income plus overtime payments they would have received if they had been at work.”
However, Duffy warned that as media coverage has focused mainly on overtime being included in holiday pay, employers should be aware that the ruling states that holiday pay should be ‘a sum equal to average earnings’. Therefore, employees who are in receipt of regular, additional earnings such as bonuses and commissions should also be included.
He added: “When the potential judgement was first raised, there were concerns among employers who had allowed employees to 'trade holiday', typically within a flexible benefits scheme, that they would have to change the way a day's value is calculated. However, as the judgement is only for the first four weeks’ pay, any additional holiday purchased would not be caught under the judgement. Also, employees are not allowed to trade down past the statutory minimums, so this further complication is removed.”
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