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Landmark ruling on overtime and holiday pay

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4th Nov 2014
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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 [2014] 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.

Replies (31)

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By ireallyshouldknowthisbut
04th Nov 2014 15:51

.

Has anyone got any analysis on exactly why these 3 claims have succeeded?  

From a basic contractual position it is generally quite clear how holiday pay is computed, so this presumably is either a case of an unclear contract specific to these employers, or is it that the contract themselves are now deemed unfair?

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Replying to rekahiy:
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By jeremybarker
05th Nov 2014 16:18

It was not really about the contract

You are starting from the mistaken belief that holiday pay only depends on the contract. The contract may deal with holiday pay but there is a minimum level set by the Working Time Regulations (WTR) and this case was about how that minimum should be arrived at. The WTR implement the Working Time Directive (WTD) and it says practically nothing about how holiday pay should be computed - just that the entitlement is a minimum of 4 weeks per year and the employer can't "buy out" holiday except on termination of employment. The WTR chose to adopt the Employment Rights Act 1996 definition of "a week's pay" as the amount to be paid. The essence of that (including its related case law) is that a week's pay comprises basic pay plus overtime that both the employer is obliged to provide and the employee is obliged to work. The case was about whether overtime the employer was not obliged to provide and, in one of the cases, various allowances had to be included in the holiday pay computation.

The Court referred to various ECJ rulings and the fundamental principle behind them is that there should be no financial disincentive to taking holiday. In essence this means that holiday pay should not be less than a typical working week's pay. The upshot is the the minimum level of holiday pay has to include overtime (at least where it must be worked if offered) and some other payments (a travelling time allowance was part of one of the appeals) as well as commission payments (from one of the previous ECJ cases).

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By Gem7321
04th Nov 2014 16:09

The judgement is here

 

It is a misinterpretation of the WTR1998 by the UK when calculating holiday pay

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Stepurhan
By stepurhan
05th Nov 2014 08:57

Common problem?

The case appears to hinge around the fact that overtime was so regular, it had effectively become part of contracted hours. Not so much a case of an unclear contract (which presumably specified "normal" working  hours and how holiday pay was calculated from them) but that the actual conduct is deemed to have altered that contract.

So the question is, are employers generally going to fall foul of this? The key question is probably going to be how regular the overtime needs to be before this kicks in. In various accounting offices, there is often a lot of overtime in January, but presumably that month alone would not be enough to create the problem.

Will employers be more wary of offering employees perfectly normal overtime for fear of tipping the balance on this?

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By johnjenkins
05th Nov 2014 11:56

That is the

key question. What is regular overtime? Is once a week regular? It will probably hit commission based employers more. The one good thing is that it could take years before implementation.

The tribunal has opted out of making a proper decision, as is always with employment tribunals. They decided that the self-employed were entitled to holiday pay. It's time this EU nonsense stopped and Government started to give us a lead. If they don't Farage will cause a major upset.

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By awoodj
05th Nov 2014 11:58

Separate Contracts

It gets even more confusing, I am aware of places which have normal employment contracts and then a separate contract for providing out of hours cover. The separate contract is subject to different terms but does this still get caught under the ruling as requiring to be paid when on holiday an not providing any cover?

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By alesmel
05th Nov 2014 11:58

I would say the problem comes from employers using regular overtime rather than increasing the part-time fraction as to reduce holiday entitlement and pension contributions.

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By johnjenkins
05th Nov 2014 12:06

@alesmel

There wasn't a problem until the EU stuck their noses in. How many years have we been paying HP on the basic. Anything else is a bonus. Taking this logic further, all benefits should be included in calculating HP.

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Replying to lionofludesch:
Stepurhan
By stepurhan
05th Nov 2014 12:58

Examine the issue, not the source

johnjenkins wrote:
There wasn't a problem until the EU stuck their noses in. How many years have we been paying HP on the basic. Anything else is a bonus. Taking this logic further, all benefits should be included in calculating HP.
You're taking the logic and  moving it beyond what has been said.

Do you really think it is right that an employer could pay holiday pay on a 30 hour week, if in practice staff are made to work a 40 hour week? That is a fundamental question of fair dealings between employee and employer. The EU is only relevant in that it is at EU level this practice is being queried. In all honesty, if employers are engaging in abusive practices and our government just ignores it happening, then perhaps the EU "sticking their noses in" is the kick up the [***] our elected government needs. If a valid concern is raised, it should not be dismissed simply because you don't like the source.

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By Mars
05th Nov 2014 12:07

JIB
Some bodies already require overtime to be reflected in employees' holiday pay. I've experienced this with the Joint Industries Board where the (can't remember the exact number) previous weeks total earnings including OT are used as the basis of holiday pay.

This could be quite unfair to employers as the employees could ramp up loads of OT in the weeks preceding their holiday even though they wouldn't normally work this level of OT to boost their holiday pay. It's also quite complicated and I know there are lots of small accounts offices around the country that would really struggle to accurately implement the JIB rules.

On the flip side of things there are loads of employers paying low wages and forcing staff to work extremely long hours just to secure a decent living, so I hope this discourages that practice.

I think as stepurhan says the key to ensuring that this is sensibly applied is to get a handle on what is considered 'normal' overtime.

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Replying to ireallyshouldknowthisbut:
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By posty133
07th Nov 2014 14:04

Unpaid overtime

Mars wrote:
Some bodies already require overtime to be reflected in employees' holiday pay. I've experienced this with the Joint Industries Board where the (can't remember the exact number) previous weeks total earnings including OT are used as the basis of holiday pay. This could be quite unfair to employers as the employees could ramp up loads of OT in the weeks preceding their holiday even though they wouldn't normally work this level of OT to boost their holiday pay.

I agree with JIB completely this is already an existing practice and it is open to abuse by employee's, in my experience this is particularly true of manufacturing companies using a 13 week average to calculate holiday pay.

This being said if the employer ensures staffing levels are correct and overtime is only used when it is necessary this issue is resolved.

In reality how much can you actually ramp up overtime in a period this long, in most cases it is going to be negligible and will broadly reflect average hours worked. This must be a cheaper or more beneficial than employing a permanent member of staff, if it wasn't why would they use this method rather than recruit additional staff?

However my concerns are based more around the wording I have seen in employment contracts that could make this ruling obsolete  in some cases, these examples were in the same contract:

The ability to lay staff off for up to 3 months without pay or redundancy (apologies I forget the statutory payment you are entitled to in this period but it is virtually nonexistent).Overtime is unpaid (considered in your basic salary, although this wasn’t reviewed while these contracts were implemented for existing employees) and mandatory, which could result in disciplinary action if it is not done at the employers request without a reasonable excuse!2 above is not an uncommon practice and may well be the norm in many instances but I have rarely seen it in writing, it has been down to the employee’s discretion. However when this is combined with waiving your maximum working week rights, this becomes almost a slave contract and will be abused by some employers i.e. Minimum wage at 40 hours but you actually work 80?

In my opinion these are completely unjust terms of contract with no security truly offered to an employee in return for their services and potentially not even fair remuneration. These are legal and were advised by employment lawyers, however it would be interesting to know what the European Court of Justice would make of these, but let’s face it, it will be sometime before they get challenged and years before a ruling is made (happy to be corrected here if this has taken place).

Far too many employers have grown to rely on 'free' labor while offering employees less rights, hopefully this will lead to a more cautious approach with the use of terms such as the above and who knows perhaps one day such actions will be put to the test fully before becoming allowable in the first place.

The point I am making here is how it can be a bad thing that essentially employees are being protected from abuse by unscrupulous employers, it should not be difficult to administer or implement given the systems used today it should be straight forward and this actually puts the onus on an employer to staff correctly in the first place, unless they use exclusion clauses like the above that is.

As for causing financial difficulty and turmoil for employers affected, the time frame this can be backdated is minimal and if this is enough to put them out of business then frankly there wasn’t long left for them anyway. As for cost going forward a responsible employer should not experience problems with this as they staff correctly in the first place and will calculate the most efficient way to move on, hopefully by avoiding agency costs.  

Before anyone gets up in arms about employers problems they should strongly consider the impact of the alternative, if just for one week employees stuck to their contractual terms how much that would cost them and the economy.

 

 

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By abaco
05th Nov 2014 12:13

Where Will the Line Be Drawn?

Will the next step be staff such as sales personnel being able to include notional commission which they haven't actually earned into their holiday pay or others with the prospect of an annual bonus? The effects of this could actually end up being counter-productive to staff, let alone hard pressed businesses, especially SMEs who heaven knows, have enough of such touchy-feely nonsense to cope with as it is.

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By Ian McTernan CTA
05th Nov 2014 12:16

Crazy

Another bad decision based on EU rules and over complicating things.

My contract (back when I had one) stipulated 4 weeks annual paid holiday.  It didn't matter whether I worked one hour of overtime or 1000, my holiday entitlement remained the same.

I assume that these workers get paid an additional rate for working overtime.  If so, I can see employers turning around and changing contracts so that overtime is now included to accrue holiday pay, but overtime will now be paid at the same flat rate as their other contracted hours, leaving the employee no better off.

You got paid for your overtime, why should that count in any way, shape or form towards holiday entitlement or holiday pay?  It makes no sense.

People also fail to appreciate what giving people extra holidays means for small firms, which need to plan around people having a set number of days off per annum, and also how tight margins are for a lot of businesses.

Of course, the unions will hail this judgement as a great success as they could care less if all companies made losses - right up until their members lose their jobs (and stop paying union dues to keep those union executives in their £150,000 per annum jobs), at which point they will bemoan 'failures of management' rather than admitting they priced their members out of a job.

I'd suggest letting union exectutives run a business for a year, but I'm pretty sure if they applied their own rules there would be nothing left to come back to...

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Replying to lionofludesch:
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By mushie
05th Nov 2014 18:13

holiday pay

"Crazy" says

 

"I assume that these workers get paid an additional rate for working overtime."

 

Very often, that is NOT the case. Then, the effective overtime rate of pay is BELOW  the normal rate. I have just such as case in my family

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By Jim Ross
05th Nov 2014 12:52

Decision is fair and correct

The ruling is to protect workers from employers who don't play fair. Take the scenario where an employee has a contract for 8 hours per week but regularly works between 12 and 20. When that employee goes on holiday they are only paid their contracted amount (8 hours).

This scenario isn't uncommon, particularly in the retail trade.

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By JC
05th Nov 2014 13:07

and tips? ...

What happens with tips - after all a great many employers used these to top-up their employees wage

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By The Rogue
05th Nov 2014 13:27

Unsocial hours

My wife is a midwife working for the NHS and she gets unsocial hours pay added to her basic every time she works a night shift, weekend or bank holiday.  Holiday pay was calculated on basic pay because when she was on holiday she didn't actually work any of these unsocial hours.  Some time ago there was a ruling that her holiday pay should be calculated using unsocial hours.  This seemed bonkers to her and to me because the extra reward she was getting was not because the NHS was getting something extra out of her.

It seems to me that the overtime ruling is an extension of this and is equally unreasonable.  The employer is being forced to reward employees for extra duties that they are not providing.

What about if there are other extras in the pay packet.  If my company does well there is a one-off bonus paid to all staff through gross pay.  Will that have to be included if a member of staff takes a holiday soon afterwards?

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By BSJBuckler
05th Nov 2014 14:07

Nothing New Here

Reg 16 of the Working Time Regs 1998 already says that a week's holiday pay  should be calculated according to s222 Employment Rights Act 1996 which determines that a "weeks's pay" where hours vary should be calculated using an average of the previous 12 week's payslips.

I've been working out holiday pay this way since 1999.  Don't understand what all the fuss is about.  It's irrelevant whether the overtime had become part of the contract or not...if it was part of the regular contractual hours, then the workers would be entitled to that much holiday pay..if it wasn' t considered part of the contractual hours, but they had been doing overtime regularly they are covered under s222.

Added bonus is that where workers have been absent in the previous twelve weeks, their holiday pay will be reduced in line with the reduction in their 12week average!

What a waste of time and money!! 

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By The Rogue
05th Nov 2014 14:16

Pay reductions

What if an employer only pays SSP when an employee is off sick.  Would holiday taken soon afterwards be paid at a reduced rate?

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By Joyce Annand
05th Nov 2014 15:11

Are they deliberately trying to put companies out of business? The Work Place Pensions are already going to hit hard for a lot of small employers

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By johnjenkins
05th Nov 2014 16:15

@stepurhan

Why should you not include benefits?

Overtime is normally paid at a higher rate (sometimes double) and unless stated it is not part of a contract. The contract should state what the entitlement is and it is up to you if you accept. What happens if you work a statutory holiday, like nurses do on Christmas day? Is a day off in lieu enough?

So are you telling me that it wasn't an EU directive that gave the self-employed holiday pay? All our crap comes from EU directives because they have to justify their existence. Listen to some of Nigel's speeches that he gives in the EU. If you don't think they are common sense then I will eat my hat. 

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By johnjenkins
05th Nov 2014 16:42

@jeremy

Would you like to inform stepurhan where the WTD originated from and our options.

Surely it is possible to have a contract that states what both parties are happy with. Some companies pay full sick pay, some just pay the statutory amount.

I presume that there wouldn't be a problem unless the employee complains. How many catering staffs hours will be cut because of this?

The real problem is what constitutes "regular overtime"? No ruling on that, just the mess it leaves.

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Replying to Wanderer:
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By jeremybarker
07th Nov 2014 15:56

You can't contract out

Of course you can have a contract that states what you are happy with but to the extent that it provides less than the statutory provision it's void. (i.e. you can't contract out of the statutory provision.) That applies to many matters - not just holiday pay.

I think that the safest approach to overtime would be to simply calculate holiday pay on the basis of average pay over the previous 12 weeks including all overtime unless you can show that the overtime was a clear one-off event and the employee was not obliged to work it.

The problem with this judgment (and several others) is that they only address specific circumstances. Until a case comes along that deals with the unanswered points - such as what about overtime that the employee does not have to work when offered - the safest route is for employers to include pretty much everything in the holiday pay calculation.

There's a useful article here: http://www.cloisters.com/news/holiday-pay-judgment-what-it-means-for-you

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By brian.barrett
05th Nov 2014 20:22

Non-guaranteed Overtime

This particular ruling makes reference to 'non-guaranteed' overtime.  My understanding of this term is overtime that you are required to work but which is not guaranteed.  This is different from voluntary overtime which is open to the whoever wants it, but which you do not have to take.

In this context the ruling appears perfectly correct that this overtime should be included: examples have already been given been given of low normal hours and large 'overtime' hours.

Personally the advice I have usually given to small employers with staff working unusual and varing hours is to acrue 12.03% of what you pay the staff when they are working, and ensure this is paid in holiday pay when holidays are taken.

Voluntary overtime is different from non-guaranteed overtime as you are free to take the work or not take the work.  As such I do feel that as current interpretation are, that provided the contract states that such overtime does not include entitlement to holiday pay, then the employee is free to take or not take up the offer of overtime work.  In essence if paid voluntary overtime at standard rate, they are be actually paid around 89.3% of basic pay, with 10.7% representing an amount for no holiday pay.  Time + 1/2 clearly takes the employee above normal basic pay.

The only things I feel to watch out for in my logic is to make sure the 89.3% does not take the employee below minimum rates of pay; and I do believe that WTD 2003 does make reference to the fact that holiday pay cannot be paid but must be taken - whether this is enforced or not I'm not sure.

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Stepurhan
By stepurhan
06th Nov 2014 08:51

Muddying the waters

All this talk about other benefits, SSP and overtime rates that are significantly above normal pay rates are just muddying the waters. I am not saying that absolutely everything should be added in for calculating holiday pay in future. I am specifically talking about regular overtime.

So let me try to make this as simple as I can. A contract says that an employees basic hours are 30 hours per week. An employee is actually made to work a 40 hour week, though they are paid for those extra hours when they are working (at standard hourly rate, not with any enhancement). If the employee actually has a standard 40 hour work week, is it not right that their holiday pay should be calculated on that 40 hour work week, regardless of what the contract describes as "basic hours"?

Because, as far as I can tell, this mirrors the facts in the case. I'm not saying what constitutes regular overtime isn't a point that needs addressing. But don't tell me its fair to allow employers to base holiday pay on contracted hours that don't reflect the reality of the job.

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By manbrick
06th Nov 2014 16:07

Missing the point

Aren't you all getting bogged down in the minutia of rules and regulations such as the WTR and completely missing what was the most valid point that John Jenkins posted - "The tribunal opted out of making a proper decision".

Given that anyone with half an ounce of common sense would know what a massive impact such a decision would have on businesses and the majority of the working population, then the sensible thing would be to give enough detail in your decision so that the majority of any uncertainty would be dismissed.

Leaving things as open ended as they are has not helped British businesses one iota. There is now so much conflicting information flying around that no-one can be really sure of what the actual judgement means, other than it probably affects them in some way. Although what to base any kind of cost calculation on seems beyond everyone.

Here's a scenario for everyone to chew over - what if on the back of this decision some businesses go to the wall, others cut overtime working and take more part time staff on. How can this help an economy that is just starting to find its feet, when workers are made redundant or have lower wages, thereby meaning less spending power?

Yes I accept that some people are currently losing out, such as having an 8hr contract, but generally working 20hrs. However, we have to remember that this current system was working well and had done for many years, before some union person had a bright idea of trying to extract more money from employers that had struggled through the recession and kept people employed all along.

Like most things one size does not fit all, but it did fit the majority and those that it didn't obviously felt that it worked as none of them had been bothered to bring this case before a tribunal.

We need to decide and decide quickly, just who is in charge of this country is it the British Gov't and their interpretation of the law, or a load of money grabbing bureaucrats from Brussels that see nothing wrong in asking for another £1.7Bn of our hard earned cash, which we need for our NHS, etc. 

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By HUGH W DUNLOP
07th Nov 2014 08:30

Overtime

So we may be seeing the end of all overtime. Employers will take on part time employees to fill the gap, and save themselves overtime rates and additional NI payments. this is one way the government will decrease unemployment. A bit of a boo boo here.

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By js.btp
07th Nov 2014 09:39

zero hour contratcs

I can understand the outcome but only where people are on contracts such as zero hours contracts - I think these contracts are despicable and where they are in place I think it only fair that employees are entitled to holiday pay based on normal working hours rather than contracted hours.  But it seems that the Country is generally in agreement with these contracts and even have had programs on TV where employees state they are happy with them.

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By johnjenkins
07th Nov 2014 11:01

@stepurhan

I totally agree that where people actually work 40 hours a week not 30, that their basic is 40 hours and so HP should be based on 40 hours. I'm quite surprised that these contracts exist because really they are up for challenge.

@manbrick I like what you say (not because you agree with my point) but you put into words my thoughts.

@js.btp I do think zero hour contracts have a place but really the people on these contracts should be self-employed.

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By alesmel
07th Nov 2014 14:03

my way to look at it

If an employee X is salaried only employee you pay annual leave/holiday pay based on salary. If the employee Y is hourly paid employee, then you pay based on hours. If employer replaces both with employee Z, doing both the salaried and the hourly job -call it overtime or additional hours or two separate contracts-, it makes sense in my head that employee Z should get annual leave based on both.

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By Kazmc
10th Nov 2014 11:53

Take action now?

I was under the impression that including overtime was not a legal requirement yet and it could be years before it becomes law.

Sage software have a link on the payroll when you login which takes you to details relating to the ruling and they advise all employers to start including overtime and commission (I thought commission was being dealt with under a separate ruling?) in holiday pay calculations immediately.

Why? For the micro employers this could have a huge impact on their business when it doesn't yet need to.

Have I got it wrong?

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