Landmark Ruling Confirms Overtime Should Count in Holiday Pay

Today (4 November 2014) the Employment Appeal Tribunal (EAT) ruled that overtime should be taken into account when calculating holiday pay. This is a landmark decision that will have significant implications for employers and employees throughout the UK.   

Prior to the ruling, the Coalition had strongly argued that overtime should not be included for the purposes of calculating holiday pay. The Government was concerned that businesses would not be in a position to afford to pay their employees these additional payments and that if they were required to backdate payments over a number of years, this could see hundreds, if not thousands of business go under. 

Most employment solicitors correctly predicted that the EAT would come down in favour of the employees but the big unknown was whether employees would be entitled to pursue claims for underpayments going back over a number of years. This was the issue causing the most concern. It is estimated that something like 5 million workers will now be entitled to more holiday pay so it is easy to understand why both employers and the Government were so nervous about the outcome.  

The ruling of the honourable Mr Justice Langstaff was that overtime pay was remuneration which had to be paid in respect of annual leave. However, he went on to say: 

“The sense of the legislation is that any series punctuated from the next succeeding series by a gap of more than three months is one in respect of which the passage of time has extinguished the jurisdiction to consider a complaint that it was unpaid.” 

This means that if there is a gap of at least three months between underpayments, the earlier period will be out of time for the purposes of pursuing a claim. This limit will be welcome news for many employers and should alleviate some of the fears that a ruling in favour of the employees would cripple the UK economy.  However, while the three month rule will limit the exposure of certain employers, others will still face claims going back a number of years and this may be too much for them to take.  

There is no doubt that the ruling is a milestone in the development of employee’s rights and that the consequences could be devastating for many business throughout Plymouth and the remainder of the UK. For these reasons, I expect to see a challenge issued to the Court of Appeal and would not be surprised if this matter rumbled on for years to come. In the meantime, employers will need to consider how they are going to react to the possibility of claims for back pay and what system they are going to introduce going forward.  

James Twine
Partner
Head of Employment
Wolferstans