Calculating pay is more complex now

Tthe question at issue was if and how elements of variable pay. Picture: Jon Savage

AS WE ENTER the festive period, thoughts will be turning to some well-earned rest as workers take time out to be with their families. However, what employers are legally obliged to pay their workers for holiday leave during that period has been a complicated question, now made slightly clearer in the wake of a landmark ruling in the Employment Appeal Tribunal (EAT) in London last month.

The ruling, arising from claims made against Amec, Hertel and BEAR Scotland, had been keenly awaited by employers, unions and workers in every sector. In a nutshell, the question at issue was if and how elements of variable pay – such as non-compulsory overtime (where there is no obligation to offer it but an obligation to work it if it is offered) and certain allowances should be reflected in the calculation of holiday pay. This would be a departure from the established norm for most UK employers, who generally calculate holiday pay predicated upon basic pay.

There was also a significant question of whether claims for historic holiday pay would be allowed – if the answer had been yes, that could have cost millions and caused some businesses to go to the wall. It is perhaps no surprise, then, that with so much at stake, the government, the CBI and the employers’ organisation EEF all expressed concern at the potential impact of the ruling and the government became involved in the proceedings.

Happily, the worst case scenario has been avoided. On the key question of whether historic underpayment of holiday pay could be claimed, the EAT’s decision favours employers. Workers cannot make claims for historic underpayment of holidays if there is a gap of three months between the underpayments as this breaks the required chain of underpayments (another EAT decision released last week agreed with this approach).

The ruling also means that where an employee has 28 days holiday entitlement, the last eight days will also break the chain as they are a UK creation as opposed to a European requirement. This ruling, like many UK rulings in employment law these days, decided that the European holiday pay requirements could be imposed through UK legislation.

Surprisingly, there has been no appeal by the trades unions and employers have largely been saved from wading through years of HR and payment records to figure out what is owed, and to whom, not to mention the many millions of pounds which could have been claimed by workers.

However, there is little doubt that the situation with regards to calculating pay is more complex now than it was 12 months ago. The position now is that certain types of overtime, namely compulsory overtime and non-guaranteed overtime and certain allowances, should now be included in how overtime pay is calculated.

And what equates to a modest increase in benefits for a single employee, taken as a whole across a large workforce, can add significant cost to the bottom line. This is something that will prompt, or has prompted, HR directors in businesses most affected across the country, to review their holiday and overtime policies with their lawyers and take a hard look at their approach to reward.

While there has been no appeal in this case, questions remain open around how other forms of variable pay – most notably commission payments (and there is a case being heard on this early next year) and voluntary overtime – should be treated in holiday pay calculations.

The additional complexity and burden of providing for additional holiday pay going forward could hit pay rises and some employers may decide to eliminate, where possible, overtime and allowances to ensure the impact of this decision is cost-neutral. Variable pay arrangements could be scrapped by some employers altogether in favour of fixed salaries as businesses seek to minimise the impact of this decision. However, transitioning into new contractual arrangements needs careful handling and analysis of the risks, although it can be done.

Whilst there are some questions that still need to be answered on holiday pay calculation, as employers in Scotland sit down to enjoy dinner this Christmas, one or two might just reflect that they could have been facing very different prospects in 2015 had the question of entitlement to historic holiday pay been decided differently.

• Diane Nicol is a partner and head of employment at Pinsent Masons www.pinsentmasons.com