Tribunal backs holiday pay claims

Companies warn ruling could put some of them out of business

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Overtime should be taken into account when holiday pay is calculated, the Employment Appeal Tribunal has ruled, paving the way for possible payouts worth thousands of pounds to workers, said Unite.

The tribunal also ruled that workers can make backdated claims, but only for a limited period.

Unions welcomed the decision on test cases which could lead to claims by hundreds of thousands of workers who do voluntary overtime.

But companies warned they face a multibillion-pound bill which could put some out of business.

The Employment Appeal Tribunal ruled on two cases relating to the UK's interpretation of the Working Time Directive, including one involving electricians, scaffolders and semi-skilled operatives who worked on a project at the West Burton power station site in Nottinghamshire.

Unite said they consistently worked overtime, but that was not included in holiday pay, meaning they received "considerably less" pay when on holiday compared to when they were working.

Unite executive director for legal, membership and affiliated services, Howard Beckett said: "Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order.

"Employers will now have to include overtime in calculating holiday pay, and those that don't should be under no illusion that Unite will fight to ensure that our members receive their full entitlement.

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Paul Kenny, general secretary of the GMB union, said: "This win in the Employment Appeal Tribunal clarifies that overtime should be included in the calculation of holiday pay. For many workers, overtime, shift payments, unsociable hours payments and other allowances were excluded when they should be included.

"GMB is asking members who did not get the same pay during holiday as during the rest of the year to contact the union so that we can assess and take forward their claims."

The ruling covered two cases involving road maintenance firm Bear Scotland as well as Amec and Hertel.

The Employment Appeal Tribunal said: "The EAT held that Article 7 of the Working Time Directive is to be interpreted such that payments for overtime which the employees in two appeals before it were required to work, though which their employer was not obliged to offer as a minimum, is part of normal remuneration and to be included as such in the calculation of pay for holiday leave taken under Regulation 13 of the Working Time Regulations 1998. Those Regulations could be interpreted so as to conform to that interpretation.

"An appeal by Bear Scotland was thus rejected, as were (on these issues) appeals by Hertel and Amec.

"A further appeal by Hertel and Amec against the Employment Tribunal's findings that the claimants could claim the consequent arrears of pay as being unlawful deductions from their pay under the Employment Relations Act 1996 (on the basis that on each occasion holidays were not paid in accordance with the true interpretation of Article 7 and the Working Time Directive the deduction was one of a series of deductions) was allowed insofar as in any case a period of more than three months elapsed between such deductions."

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More than nine in 10 manufacturers are set to see payroll costs "spiral" as a result of the ruling, the manufacturers' organisation EEF warned.

The group said over two-thirds of manufacturers estimate that the change to holiday pay calculations will add more than 3% to their current payroll costs, while two out of five anticipate an increase of at least 5%.

Firms will have little option but to factor the additional costs in to future pay negotiations and to reduce overtime, while one in four could cut jobs, said the EEF.

"The findings demonstrate the scale of the issue for British manufacturers, who are being punished for adhering to, or even exceeding, UK legal requirements. The decision to apply stringent new EU laws on how holiday pay should be calculated will require employers across Europe to now factor in additional payments such as overtime and commission.

The ruling could also leave companies open to paying National Insurance contributions on the backdated pay. The changes could land businesses, including small and medium-sized firms, with extensive bills through no fault of their own," said the EEF.

It urged the Government to protect businesses by limiting the timeframe for backdated claims to significantly less than six years and to prevent employers from facing tax and National Insurance penalties.

Tim Thomas, head of employment policy at EEF, said: "Today's ruling is a blow for employers, but we won't see the full extent of damage until further down the line. It's clear that many businesses will now be left facing difficult choices, despite having always complied with UK law, and there is a real danger that this ruling could ultimately hit jobs, pay and future investment.

"This is why ministers across Government must act now to protect employers from the fallout. Without immediate Government action this ruling will undoubtedly impact on the competitiveness of UK plc and put future jobs and investment at risk."

Andrew Stones, employment partner at international law firm Squire Patton Boggs, who led the appeals on behalf of two of the employers in this case, said: "The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern amongst employers of the potential impact of historic holiday pay claims. Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today.

"Although opinions are mixed and we do not agree with some of the findings, we are pleased with the limits put in place on retroactive claims. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims. This finding will significantly limit the scope for such claims in the future and the flowing potential liability for companies.

"While there are likely to be many businesses across the country, both big and small, that are still concerned about how this judgment could impact them, this is a very significant and positive finding for employers worried about retrospective liability.

"In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay."

CBI director-general John Cridland said: "This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds - and not all will survive, which could mean significant job losses.

"These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.

"This judgment 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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