Landmark ruling sets precedent on holiday pay calculations

Businesses who operate with workers on a regular overtime and commission basis should take heed of a landmark decision by the Employment Appeal Tribunal which ruled that UK regulations were out of line with EU law on 4th November 2014.

The tribunal involved employees from engineering firm Amec, industrial services business Hertel and roads maintenance company Bear Scotland and ruled that workers paid regular overtime and commission rates should receive more than their basic rate of pay during annual leave.

Alan Lewis, head of employment at Linder Myers Solicitors in Lancashire comments: “The decision is significant and means that businesses will have to start taking into account employees’ overall remuneration when calculating holiday pay and not just pay workers their basic rate during annual leave in line with the UKs Working Time Regulations Act 1998.

"The case will have significant ramifications to those employees whose pay is significantly enhanced by commission and bonuses, as well as those employers that rely upon their employees working regular overtime. The decision also has a retrospective effect which has caused great anxiety amongst business owners.

“Many businesses are worried that they could face significant claims for backdated holiday pay, which the CBI has estimated could run into “billions of pounds”. The Government has set up a task force to address the significant implications of the case and the exposure businesses now face to costly tribunal claims.”

The ruling only applies to the minimum four weeks’ holiday required by EU law and not to the additional 1.6 weeks provided by UK regulations or any discretionary holidays. Employers may also avoid costly retrospective claims, stemming back many months or even years, if they can establish a gap of more than 3 months between successive underpayments of holiday pay. The decision is likely to be appealed to the Court of Appeal.