Overtime should be included in holiday pay

The Employment Appeals Tribunal has ruled today that non-guaranteed overtime payments should be taken into account when calculating holiday pay. At the moment, holiday pay is generally calculated on the basic level of pay, so some people who work overtime could make claims for extra holiday pay and even potentially backdate the claims.

This is a very serious issue for UK business and a land mark ruling. It could easily cost UK businesses 1 or 2 billion pounds a year and also tie up important management time. Businesses shouldn’t underestimate the impact of this ruling – I can imagine that a number of employees will be likely to jump at the chance to claim back any extra money. It’s been a tough couple of years and many have seen very little real increase in their earnings recently.

Retail and manufacturing businesses are likely to be heavily impacted by this as they tend to have large numbers of employees who work significant amounts of overtime. From the conversations I’ve had with a number of them, there is real concern that an influx of claims could have a substantial and serious impact on their bottom line and could threaten their survival. It could force many companies to completely review their existing work and pay patterns and forever change the manner in which overtime is paid in the UK.

Businesses need to act quickly and plan on how to protect themselves against any potential claims. I’d advise using a three step action plan.

  • First, businesses need to determine if they are at risk in the first place.
  • Then they need to establish the amounts involved and whether it’s mainly an historic issue or an ongoing potential cost to the business. 
  • Finally, businesses should review their existing policies and procedures to safeguard their position in the future as well as look to take action to reduce the costs of this ruling in the future.

But despite these warnings, the judgment isn’t as severe as many had feared. Businesses can take some comfort in that fact that the extent of backdated claims could be substantially reduced or even ruled out if there is a gap of three months between holidays. The limitations on backdated claims could considerably limit the potential cost for some employers.

If you’d like to talk about this issue further, please do get in touch with me or your usual PwC adviser.

John Harding | Partner
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