Holiday

What has been decided? 

As published on our Talking HR blog, the Employment Appeal Tribunal (EAT) has decided in a number of conjoined cases[1] that holiday pay under European law[2] must be based on the normal remuneration received by a worker, so any overtime worked (including ‘non-guaranteed’ overtime) must be taken into account.

The EAT has given leave for its decision to be appealed to the Court of Appeal. In the meantime, employers will need to pay close attention to regularly worked overtime when calculating holiday pay. Employers should also work out precisely what needs to be included in the holiday pay calculation. As a result of the decisions, there is likely to be additional administrative work and costs. In addition, there is uncertainty regarding how far back employers should look when rectifying underpaid holiday pay, if that is what they decide to do.

What impact will the decisions have on pensions? 

The decisions could affect both defined benefit and defined contribution pension schemes which include variable elements in their definition of pensionable pay, for example, bonus and commission payments. It is likely that contributions should have been paid on a higher amount of pensionable pay. If, as a result of the decisions, pension schemes look to rectify past pension underpayments, there will be clear cost implications for the schemes and ultimately for the employers. Schemes will need to take advice on whether such remedial action is required.

The EAT decisions could also have another implication on pensions, this time from an auto enrolment perspective. Under the Pensions Act 2008, employers must automatically enrol all UK workers aged between 22 and state pension age, who earn above the ‘qualifying earnings’ threshold in a qualifying pension scheme. It has been suggested that, in order for employers to correctly calculate holiday pay and take into account overtime, a reference period of perhaps 12 weeks could be used. The increase in holiday pay over the period because of the inclusion of overtime could mean that workers are tipped over the qualifying earnings threshold and will need to be (or should already have been) enrolled in a qualifying scheme.

What next?     

It is likely that the cases will be appealed to the Court of Appeal. In addition, the Government has announced that it will set up a task force to assess the decision’s possible impact on businesses. These will be factors considered by employers and pension schemes when deciding whether to make changes now to the way in which holiday pay is calculated, whether to revisit past contributions and whether to further consider auto enrolment criteria for employees.

This post was contributed by Charlotte Baetul. For more information, email blogs@gateleyuk.com.

[1] Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, Amec Group Limited v Law and others, UKEAT/0047/13

[2] Under Article 7 of the European Working Directive, all employees have the right to receive a minimum of 4 weeks’ paid annual leave. This directive is implemented in the UK by the Working Time Regulations 1998.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.