Employment Appeal Tribunal alters holiday costs for employers

MARKING a significant change to current UK law, a much-anticipated Employment Appeal Tribunal (EAT) judgment has confirmed many employers’ fears that certain overtime payments and other elements of remuneration must be included in the calculation of holiday pay.

In light of these cases, many employers may need to make substantial changes to the way in which they calculate holiday pay and may face material liabilities in relation to historic payments.

The recent cases in Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, and Amec Group Ltd v Law and others have clarified a number of points.

Firstly, the EAT found that non-guaranteed overtime payments (for overtime an employer is not obliged to offer but employees are required to perform) should be included in the holiday pay calculation for workers’ four weeks of holiday entitlement under European law. Other payments which need to be included in the calculation are those which form part of normal remuneration, such as paid travel time.

Potential claims for backdated holiday pay may go back six years or even as far back as 1 October 1998, when the relevant UK regulations on paid annual leave came into force (subject to the qualification below).

What’s the risk for employers?
There is the potential for significant financial liabilities as workers will be able to bring claims for “unlawful deduction of wages”.

However, a key part of the recent EAT finding is the confirmation that a series of deductions can be broken by a break in between holidays of three months or more, potentially reducing employers’ financial exposure. I suspect that this point is likely to be appealed by the trade unions.

There will also be greater operational complexities on how to reward workers. Will employers decide to calculate the amount due for the four weeks of holiday entitlement under EU law differently from bank holidays and any additional contractual holidays? What changes will be required to payroll, HR and time and attendance systems?

While it is still early days and further appeals are expected, employers that have significant numbers of workers who can earn variable elements of pay with overtime, paid travel time or commission are likely to be most affected. Those with lowest levels of turnover are likely to face the biggest risk of significant liabilities for earlier years.

What should employers be doing?
Employers should act quickly to assess whether they are affected and, if so, their potential historic and future liabilities. As the decision has retrospective effect, employers will need to agree a remediation approach as well as correcting the future position. The ability to use tools that can interrogate your payroll and holiday data will be important.

In terms of accounting entries, each business will need to consider its unique facts and circumstances to determine if it is affected and, if so, whether a material exposure exists. As well as different patterns of pay and work between employers, further legal advice may be required if businesses have operations in other European territories.

Businesses will need to consider if their specific circumstances give rise to a liability that needs to be recognised or if a contingent liability needs to be disclosed. Businesses need to determine if a present obligation exists – it is probable that this obligation will result in a material outflow – and if the magnitude of the outflow can be reliably estimated. If all this is the case, then the best estimate of the liability should be recognised.

In many cases, it may not be possible to reliably estimate the future outflows even if they are considered probable. In such circumstances, a contingent liability may be disclosed if material. Employers should take this time to assess the impact and any potential liabilities, agree remediation approaches, and ensure that payroll operations are configured to minimise the disruption of compliance. ?

Impact assessment  

• reviewing workers’ contracts and working patterns to assess the impact on the business;
• identifying what elements of pay might have to be included;
• assessing current payroll systems to identify any changes required;
• assessing the current degree of risk of claims or grievances being brought by workers; and
• formulating a strategy to minimise financial and reputational risk, such as how to implement changes to terms and conditions of employment and how to communicate with staff and unions.

Employers should start to think about:

• who in your workforce may be affected?
• how are you calculating holiday pay?
• what other elements of remuneration must be included when calculating holiday pay?
• what are the historic and future cost implications and how can they be reduced?
• can your payroll be tailored to calculate holiday pay for workers on different work or pay patterns?
• are you able to pay different holiday entitlement (European v additional UK) at different rates?
• do you have sufficient records to help you address any query or complaint and defend any claims? and
• what, if anything, will need to be disclosed in your accounts?

John Harding is a partner in PwC’s pay, performance and reward team