Best not just wait for holiday pay decision

Doing nothing is unlikely to be the best strategy, says Dawn Dickson
A change to holiday pay policy now will ensure that claims going back years are unlikely to be a risk to their business. Picture: Jon SavageA change to holiday pay policy now will ensure that claims going back years are unlikely to be a risk to their business. Picture: Jon Savage
A change to holiday pay policy now will ensure that claims going back years are unlikely to be a risk to their business. Picture: Jon Savage

FOLLOWING the recent Employment Appeal Tribunal ruling over holiday pay entitlements for employees who earn commission and work overtime, many employers appear to be adopting a wait and see approach as to what happens next.

However, with any appeal against this decision not expected to be heard until the middle of next year, this might not be the most sensible course of action.

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Whilst it is understandable that businesses will not want to increase their costs and create a precedent for covering annual leave now when there’s the prospect of this decision being reversed on appeal, the greater risk is that by failing to act now they are building up an historic and costly liability.

The current position is as good as it is likely going to get for employers. A change to holiday pay policy now will ensure that claims going back years are unlikely to be a risk to their business. Given the direction of travel of the law in this area, most businesses will be better placed if they make changes to their holiday pay provisions now or, at very least, devise a strategy for managing risk and costs.

The purpose of the Working Time Directive is to protect the health and safety of workers by ensuring they take sufficient rest periods. The prevailing view of those deciding holiday pay-related cases is that workers paid less for a week’s holiday than a week’s work are effectively being disincentivised to take leave. On that basis, the best prediction that can be made at present is that the Employment Appeal Tribunal’s decision will stand.

We have known for some time that guaranteed overtime must be included in the calculation of holiday pay. The recent appeal decided the non-guaranteed overtime (that which the employee has no right to but must accept if offered) should also be included. In my view, allowances and time-based payments linked to work should also be included. While truly voluntary overtime and its inclusion has not yet been decided upon, the writing would appear to be on the wall for other payments.

Time will tell but the way the law appears to be going on this issue is that a week’s holiday pay will likely be an average of what the employee has received in their pay packet related to work done in the previous 12 weeks.

Meanwhile, the decision in relation to how far an employee can go back with their holiday pay claim favours employers at present. My advice to any business or organisation, however, would be to address the problem by taking a number of key steps.

Firstly all employers should audit the financial, legal and commercial risks to their business, estimating the additional costs of holiday pay as being between 8.33 and 12.07 per cent above present levels. Thereafter contracts of employment should be checked to ensure they don’t pose problems in light of this recent decision.

An example of this would be to take steps such as reviewing allowances to ensure that they are genuinely intended to meet costs and are evidenced so that there is no question of them falling within the calculation of holiday pay. Likewise any allowance, overtime and commission wording should be carefully scrutinised.

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It is clear that going forward the cost of paying employees for a week’s holiday will increase for many businesses. In light of this a strategy needs to be planned for meeting this additional cost.

This may include everything from meeting the additional liability as an extra cost to the business to taking steps to reduce payments made to employees in other areas such as discretionary bonuses so that the overall cost of employment doesn’t become unsustainable.

Once the size of the problem has been assessed it is for businesses and other employers to choose whether or not to act and when they should do so.

While it is impossible to predict the outcome of the forthcoming appeal on holiday pay, one thing is certain: doing nothing is unlikely to be the best strategy. This ruling will impact on many employers and the best advice for them is to make changes now or, at very least, develop a commercial strategy which has carefully assessed the risks to their business.

Dawn Dickson is a partner and head of employment law at Davidson Chalmers LLP