Holiday Pay and Overtime – Questions and Answers
The impact of case law on holiday pay and overtime has been in the media recently. In December 2014 the Government announced a planned change to the Employment Rights Act 1996 in relation to claims for deduction of wages. This could change the way your business needs to pay workers their holiday pay. When making claims for a series of backdated deductions from wages, including any shortfall in holiday pay, the period that the claim can cover will be limited to a maximum of 2 years. It is expected that the effect of this change will be to limit the scope for a claim for deductions from pay going back more than 2 years for any claim presented on or after 1 July 2015.
Q) What are the first things we need consider in relation to this topic?
A) To analyse your risk of claims and to see how you can minimise the risk of claims in the future you must analyse what is written down, contractually and in any company handbook or manual. Also check what overtime is being done and what is actually being paid to staff for holiday pay.
Q) What should we do if we decide its best to change our policies, procedures and working practices in relation to this?
A) We would recommend staff consultation to facilitation open discussions with staff and, if relevant, Trade Unions, the appointment a Staff Rep can also help. Mediation may even be utilised to solve tricky situations. New contracts of employment and new handbook policies and procedures may need to be written and implemented.
Q) We have heard the phrase “a week’s normal remuneration” but there are still questions around how this is calculated. How should we calculate this?
A) There are varying ways this is calculated. When looking into your current practices you should consider the following because not including these elements in holiday pay could leave you open to the risk of a claim:
• Non-guaranteed overtime and guaranteed overtime may need to be included. Guaranteed overtime is defined as what is contractual, non-guaranteed is defined as overtime the company is not obliged to offer but if offered the worker must do. Voluntary overtime, which is defined as overtime that the business is not obliged to offer and if does offer, the worker are not obliged to do it, is still up for question in relation to holiday pay.
• Commission payments may need to be considered.
• Work-related travel may also need to be included.
Q) How do we calculate a “week’s normal remuneration” for staff with different patterns of working hours?
A) For workers with a fixed working week holiday pay would be based on a normal week’s remuneration. Workers with no normal hours or those on shift work would usually be based on the average of the previous 12 weeks. This may be up for question in the future as elements like commission can vary seasonally and therefore the 12 week rule may not be fair if applied in some cases.
Q) I have heard there are different requirements of what to include in normal weekly pay for contractual versus statutory holiday. What is the difference?
A) This will depend on what is written in the employee’s contract. There may be a case to only apply these additional elements to the 20 statutory days leave under the EU Working Time Directive and not the additional 8 days of annual leave required under the UK Working Time Regulation. It does not usually apply to additional contractual annual leave.
Q) Which employees have the right to make a claim? Will we be getting claims from all staff?
A) The following need to be in place for an employee to the right to make a claim:
• Anyone making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an employment tribunal claim.
• If a claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between those underpayments.
• Only the 4 weeks’ annual leave entitlement (20 days for full time employees) under the original Working Time Directive are covered by this judgment, rather than the full 5.6 weeks’ leave.
Q) Noting the seemingly every changing nature of this, are there any areas that we need to look out for in the future?
A) Yes, the following: Voluntary Overtime – there is currently no definitive case law to suggest that this needs to be included. Commission – In May 2014, the European Court of Justice heard the case of Lock v British Gas Trading Ltd. The outcome of this was that commission which workers normally earn should be included in holiday pay. This ruling has been referred back to the UK and so how calculations should be made and whether these claims can be backdated is still in question.
Work-related travel – Recent case law, November 2014, has suggested that payment for worked-related travel should be included in the payment of holiday pay. Calculation of “a week’s normal remuneration” – as mentioned above, this is still in question, particularly in relation to commission payments.
We at Park City can guide you through this complex area and help minimise the likelihood of unexpected claims and therefore costs.