Holidays and overtime pay

11 August, 2014
by: Cripps Pemberton Greenish

The holiday season is now in full flow as is a debate as to what a worker should be paid whilst they are on holiday. The entitlement to holiday pay comes from a European Directive. It was introduced in the UK in 1998 by the Working Time Regulations (WTR). The Directive requires that workers are paid whilst on holiday but does not stipulate the rate of pay. The WTR refer to the concept of a ‘week’s pay.’ In 2004 the Court of Appeal held that overtime should not count towards the calculation of holiday pay unless it is both compulsory and guaranteed. This position is now being challenged. In a number of recent cases, the courts have held that payments which are intrinsically linked to the performance of duties, such as overtime and commission payments, should continue to be paid during holiday.

Two cases challenging this point were held in the Employment Appeal Tribunal (EAT) at the end of July. We do not know when the EAT will make their decision in these cases and there may be further appeals. What is clear is that the question of what a worker should be paid whilst on holiday is not going to go away.

The outcome of these cases could have huge financial implications for employers. John Lewis is reported to have settled a holiday pay dispute with its staff last year for £4 million. If the courts decide that holiday pay should include overtime payments, there will be increased on-going staff costs. What is perhaps more worrying is that workers whose holiday pay has not included an element to reflect overtime payments, may also be able to backdate their claims to 1998 when the WTR were introduced. We do not yet know when we will have a clear answer on this issue. For now, it is prudent to review holiday and overtime pay arrangements to evaluate the potential exposure for your business.