Workers have won an important case at the Employment Appeal Tribunal that overtime should count when calculating holiday pay.
Currently, only basic pay counts when making the calculation.
The ruling could result in some people claiming for additional holiday pay. The tribunal also ruled that workers can make backdated claims, but only for a limited period. Employees will not be able to claim more than three months after the last incorrect payment.
However a final decision on these matters could be a number of years away if the ruling is referred to the Court of Appeal.
The tribunal  UKEAT 0047_13_0411 ruled on three cases: Road maintenance company Bear Scotland v Fulton, engineering firm Amec v Law and industrial services group Hertel v Wood.
The employees originally won their claims and the tribunal has now rejected appeals from the companies.
In coming to his decision, tribunal appeal judge the Honourable Mr Justice Langstaff referred back to a number of cases testing Article 7 of the Working Time Directive (2003/88) that made their way to the Court of Justice of the European Union.
In cases including British Airways v Williams and Lock v British Gas Trading, the CJEU laid down the principle that pay to be received during a holiday “is a natural continuation of the pay which has been received before the holiday began,” the tribunal concluded.
“Since the decision is one of the CJEU I must treat it as of the highest authority,” wrote
“'Normal pay' is that which is normally received… In my view, therefore, Article 7 requires and required non-guaranteed overtime to be paid during annual leave.”
Having made his decision, however, the judge did not give any directions on how holiday entitlements relating to periods of overtime were to be calculated or administered through payroll and HR systems.
However, he did cite precedents from three UK employment tribunal cases (Tarmac, Bamsey and Lotus) where the employees' contracts stipulated that “normal working hours shall be taken to be 38 hours per week”. While finance and payroll managers scratch their heads about the implications of the appeal decision, we are likely to see a lot of contractual amendments in the near future.
In an Any Answers thread that sprang up after the decision was announced, AccountingWEB member Mojomarm commented: The problem is as the ruling is only a couple of hours old, I'm struggling to find any concrete information as to how this adjusted holiday pay should be calculated, and therefore the financial implications on how it will affect our firm. I know that the backdated claims can only go back three months but after that...
“The whole thing is looking like an administrative nightmare, which will make the monthly payroll run even more tedious given the extra work due from pension auto-enrolment.”
The British Chambers of Commerce took an even stronger stance. BusinessZone reported this statement from BCC executive director of policy and public affairs Adam Marshall: “The pressure being placed on businesses by both the British tribunals and European courts on the issue of holiday pay is becoming unbearable.
“After the worst recession in living memory, with many companies working to reverse pay cuts and invest in their employees, giant new pay claims could be a huge blow to their growth prospects.”
According to the government one-sixth of the 30.8m people in work, around five million workers, get paid overtime.
This morning business secretary Vince Cable said he would be setting up a task force to look into the impact of the ruling.
Stephen Ibbotson, director of business at ICAEW, echoed the Chambers of Commerce by commenting that the ruling has the potential to “seriously impact” growth prospects at a time when business confidence is falling.
“So many businesses that have struggled to survive during the recession and increase headcount will now find that their costs could increase at a stroke, and the increased regulation from the Working Time Directive will not help them along the way.
“There are many questions still to answer – just what exactly constitutes regular overtime? What does this mean for commission-based salaries? We’re at the beginning of a long road of appeals and counter-appeals, which only adds to uncertainty – but in the meantime employers will need to ensure that they make provisions for the increased costs that will undoubtedly occur,” he said.