Is holiday pay now all-inclusive?

A tribunal decision could prompt employers to take a long hard look at how they are calculating annual leave payments

The John Lewis Partnership has announced that it is paying out a total of £40 million to staff, having discovered that it had been calculating holiday pay incorrectly for several years. The newspapers gleefully seized on the story: the headline 'Never knowingly underpaid' practically writes itself.

However, this is the tip of the iceberg. Recently an employment tribunal decided, in Neal v Freightliner, that EU law requires that a worker's holiday pay should include not only salary, but also any element of remuneration 'intrinsically linked' to the tasks required under the worker’s contract.  The tribunal held that this included both compulsory and voluntary overtime, as well as basic salary.  Currently, many businesses calculate holiday pay on the basis of basic salary only, so this could have a major impact.

Claims

The decision seems likely to prompt a rash of similar claims by workers in industries where overtime is common - retail and hospitality are just two examples.  Such claims could be particularly challenging for businesses. The good news is that the liability isn’t open-ended - tribunal claims must be brought within three months of the last underpayment, so only current workers and recent leavers will be in time to bring claims (although tribunals can allow late claims). The bad news is workers can potentially backdate their claims to 1998 (when the Working Time Regulations came into force) or to the start of their employment if that’s later. Not only does this increase the potential compensation, but it also greatly adds to the complexity and cost of defending any claim or calculating the money owed.

Two key issues arise for businesses: how to deal with potential claims and how to calculate holiday pay now.

First, a word of caution.The Neal decision is being appealed by the employer (and may go all the way to the Supreme Court) so the most prudent approach may be to await the outcome of the litigation before implementing major changes. The appeal courts could restrict the scope of the decision or give further guidance on how holiday pay should now be calculated. Businesses should take specialist advice on this issue.   

Checklist

However, in the meantime, organisations should consider the following issues. Employers should:

  • ensure that working time and overtime records are accurate.  If the Neal decision is upheld, holiday pay will need to include shift premiums and overtime pay, so proper record-keeping is essential
  • investigate now whether any changes to payroll systems would be necessary, so that any new scheme can be implemented swiftly once the business is advised to do so  
  • for new joiners, consider whether overtime should be paid at the normal hourly rate rather than at an enhanced rate (this could reduce the holiday pay bill, although overtime will still need to be included in the calculation)
  • analyse the business' risk exposure (particularly in relation to backdated claims) and start to gather the information required in order to calculate the money owed to each worker if the decision is upheld.    

Directive

Bear in mind that the principle that overtime should be included in holiday pay applies only to the four weeks' annual leave guaranteed under EU law, rather than to the additional 1.6 weeks' leave provided for in UK law.  Businesses should consider whether their current payroll and holiday pay systems would enable this distinction to be made, and what this would add to the administrative costs. Some organisations may prefer to calculate all holiday pay using the same method, to keep it (relatively) simple.

Multiple claims

Unionised workforces are particularly likely to bring multi-party claims. Although the recent introduction of fees in the employment tribunal may discourage individual claimants, the cost per claim reduces if more claimants are involved.  Businesses may want to consider reaching a negotiated settlement with unions for these claims.  Employers should remember that statutory claims can only be waived via Acas conciliation or a settlement agreement, so they should ensure that the correct documentation is put in place if a settlement is reached.