Business groups’ fury over holiday pay ruling

BUSINESS leaders have voiced concerns over possible job losses and company failures after workers won a legal case at the Employment Appeal Tribunal to include overtime in holiday pay.

This means all people working voluntary overtime could claim for additional holiday pay. Currently, only basic pay counts when calculating holiday pay.

The ruling could be appealed to the Court of Appeal, meaning a final decision may be some years away. The ruling has widespread implications for all companies paying overtime to their staff.

The government estimates that one-sixth of the 30.8m people in work get paid overtime. This means around five million workers could be entitled to more holiday pay.

John Cridland, CBI director-general, said: “This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses.

“These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.  This judgment must be challenged. We need the Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”

Mike Cherry, policy chairman of the small firms’ lobbying and pressure group Federation of Small Businesses, warned that “hundreds of businesses would shut down” unless the government brings in emergency legislation to prevent backdated claims.

He added: “Business has done everything it could to comply with the law at the time and now to have it changed is totally wrong. Our members are very clear about this – it could have severe implications.”

Allie Renison, head of EU and trade policy at the Institute of Directors, said: “Overtime has never been included in holiday pay before and many companies are rightly worried about the administrative nightmare this judgement creates. The extra complexity will be hard for small firms in particular to handle, especially in industries where the workload shifts up and down over the year.  

“There is some consolation in the fact that back-dated claims may be limited to three months, but it’s not clear how watertight this limitation is. Overall, it will increase costs for businesses, and the money has to come from somewhere. Firms may have to postpone investment or hiring, or give existing staff fewer hours.”

Business Secretary Vince Cable responded by announcing he is setting up a taskforce to quickly assess the possible impact of the ruling. This group will be made up of Whitehall officials and business representative groups.

Cable said: “Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.”

In Yorkshire, Richard Yeomans, employment partner at Addleshaw Goddard, said: “There is no doubt that the judgement is significant – businesses could be looking at the financial magnitude of an equal pay claim. However, the true scale of the potential liability is still uncertain; in particular, in practice how far back might claims go and how will the holiday pay be calculated; for example, when calculating the overtime element of holiday pay, what is the previous reference period used to calculate that overtime.

“On a positive note for employers, the Judge indicated that a gap of three months between deductions may “break the chain” so that the employee cannot include the earlier holidays in a deduction from wages claim – this may provide some relief to employers who are looking to avoid claims extending back to 1998. However, there is a risk that those employees could instead consider a breach of contract claim stretching back six years.

“In addition, there is a grey area around what evidence employees will need to provide to show that elements of their remuneration package, that are not basic pay such as overtime and commission, are intrinsically linked to the tasks that they perform under their contract. Lack of data and clarity on what constitutes ‘intrinsically linked’ to contractual tasks could make it difficult for employees to bring claims and therefore impact the number of claims that come forward.”

Rupert Hutton, pay expert and director at PwC in Yorkshire, highlighted this as a “very serious issue” for UK business and a land mark ruling.

“This could easily cost UK businesses billions of pounds per year, while also tying up important management time,” he said. “However, the judgment is not as severe as many had feared and businesses can take some comfort in that fact that the extent of backdated claims may be substantially reduced or even ruled out if there is a gap of three months between holidays. The limitations on backdated claims could considerably limit the potential cost for some employers.”