Talking Point: Uncertainty shrouds overtime pay ruling
CHANGES to employment law are often accompanied by headlines about ‘ticking time bombs’ and stories about small and medium-sized (SME) companies facing dire consequences.
There is often a degree of hyperbole or, dare we say it, scaremongering at play and things rarely turn out to be as black as they are painted.
But with the recent ruling on holiday pay and overtime there is no doubt that a large number of employers are going to be affected, especially in sectors such as manufacturing, retail and construction where overtime is routinely used as a way of dealing with an increase in workload without taking on extra staff.
The ruling means all people working voluntary overtime could claim for additional holiday pay.
The Government estimates that one-sixth of the 30.8m people in work in the UK get paid overtime. This means around five million workers could be entitled to more holiday pay.
To recap, the Employment Appeal Tribunal (EAT) on November 4 handed down a judgment about how much holiday pay someone should receive under the Working Time Regulations 1998.
Previously, holiday pay under the regulations was based on a calculation of “a week’s pay” in the Employment Rights Act 1996. That had the effect, in many cases, of excluding additional payments such as overtime, commissions and bonuses from that calculation.
But EAT has said that overtime payments in the period leading up to the holiday must be taken into account in the calculation of holiday pay for holiday taken under the regulations. It will not be enough to have an agreement that only “basic pay” should be paid for periods of holiday. A calculation will, experts suggest, be made over a 12 week period prior to any holiday.
The EAT’s decision only covers the first 20 days of holiday under the regulations. It does not relate to the remaining eight days’ holiday under the regulations or to any additional contractual holiday entitlement.
Perhaps the most worrying part for employers is that the effect of this judgement is retrospective. It means that many employers could now face claims for “holiday back pay”.
This is no cut-off date beyond which a claim can reach back but the EAT has decided that if there is a gap of more than three months between underpayments of holiday pay, that will break any ‘chain’ of underpayments.
It is not sure, though, how watertight the three month ruling is and it is possible that claims outside of this underpayment window could be challenged in the courts.
In reality some employers are likely to re-think their use of overtime in light of this decision, although in the busy Christmas period this is going to be difficult for many businesses.
There is a lot to be ironed out relating to the detail of this judgement and that will only become clear when the first cases are heard.
Business bodies such as the CBI and the Federation of Small Busineses (FSB) have been vocal in their opposition to the EAT ruling with CBI director-general John Cridland calling it “a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds” and warning of significant job losses and FSB policy chairman Mike Cherry warning that “hundreds of businesses would shut down” unless the Government brings in emergency legislation to prevent backdated claims.
Ironically, the ruling could lead to the creation of more jobs as employers may prefer to increase the size of their workforce – at least with part-time workers – rather than pay overtime and face claims down the road.
From an employee’’ perspective, quick thinkers might also decide to book holidays after a lucrative period of overtime or bonus work, thus beefing up their holiday pay.
But they will have to weigh this up against ‘killing the golden goose’ as employers are unlikely to be able to sustain such a financial burden.
What isn’t in doubt is just how widespread the effects of the ruling could be.
A recent FSB survey found a third (31%) of small businesses with employees paid staff for voluntary overtime while one in ten (11%) of small firms with staff also offered some form of commission.
It suggests this equates to as many as 400,000 UK small businesses being affected by the ruling.
It is impossible to estimate the cost to British business of the ruling but many commentators suggest it could run into billions of pounds. One company, retailer John Lewis, reviewed its policies in the summer and has already set aside £40m to compensate its workers.
So far so scary but there is a chance that the ruling could be sent to the Court of Appeal, meaning a final decision may be some years away.
And the Government is concerned about its potential impact on businesses – and business support this close to a General Election. Business secretary Vince Cable has already announced that a task force will be set up to look into the implications of the judgment “as a matter of urgency”.
Also there is no shortage of advice to firms which are likely to face claims.
Employers of all sizes are being advised to review how holiday pay is calculated and paid across their workforces.
The advice is that if it looks likely that a company might be at risk of back-pay claims, they should take practical, commercial advice on the level of risk and how they can minimise it.
Importantly, they shouldn’t wait for the claims to hit before taking action.
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